-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PZHLKLAhoyMxxF7x/7H7zke5GIkqIuid9p8qEXj2KWirz0IELE0ydsPw8VKH8yRt 2Vs0hhvNP6kOxgPlyg8FQw== 0000950116-00-001236.txt : 20000516 0000950116-00-001236.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950116-00-001236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENESIS HEALTH VENTURES INC /PA CENTRAL INDEX KEY: 0000874265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 061132947 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11666 FILM NUMBER: 635242 BUSINESS ADDRESS: STREET 1: 101 EAST STATE STREET CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: 6104446350 MAIL ADDRESS: STREET 1: 101 EAST STATE STREET CITY: KENNETT SQUARE STATE: PA ZIP: 19348 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 1-11666 GENESIS HEALTH VENTURES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-1132947 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 101 East State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [ x ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of May 9, 2000: 48,640,262 shares of common stock TABLE OF CONTENTS
Page ---- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............................................ 1 Part I: FINANCIAL INFORMATION Item 1. Financial Statements............................................................. 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................ 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 33 Part II: OTHER INFORMATION Item 1. Legal Proceedings.................................................................. 34 Item 2. Changes in Securities...............................................................36 Item 3. Defaults Upon Senior Securities.................................................... 36 Item 4. Submission of Matters to a Vote of Security Holders................................ 36 Item 5. Other Information.................................................................. 37 Item 6. Exhibits and Reports on Form 8-K................................................... 37 SIGNATURES............................................................................................38
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Statements made in this report, and in our other public filings and releases, which are not historical facts contain "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to statements as to: o certain statements in "Management's Discussion and Analysis of Financial Condition and Results Of Operations," such as our ability or inability to meet our liquidity needs, scheduled debt and interest payments and expected future capital expenditure requirements, and to control costs and to sell certain assets; and the expected effects of government regulation on reimbursement for services provided and on the costs of doing business; o certain statements in the Notes to Unaudited Condensed Consolidated Financial Statements concerning pro forma adjustments; and o certain statements in "Legal Proceedings" regarding the effects of litigation. The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that any statements are not guarantees of future performance and that actual results and trends in the future may differ materially. Factors that could cause actual results to differ materially include, but are not limited to the following: o our default under our senior credit agreement and certain of our senior subordinated notes; o our substantial indebtedness and significant debt service obligations; o the effect of planned dispositions of assets; o our ability or inability to secure the capital and the related cost of the capital necessary to fund future growth; o the impact of health care reform, including the Medicare Prospective Payment System ("PPS"), the Balanced Budget Refinement Act ("BBRA") and the adoption of cost containment measures by the federal and state governments; o the adoption of cost containment measures by other third party payors; o the impact of government regulation, including our ability to operate in a heavily regulated environment and to satisfy regulatory authorities; o the occurrence of changes in the mix of payment sources utilized by our patients to pay for our services; o competition in our industry; o our ability to consummate or complete development projects or to profitably operate or successfully integrate enterprises into our other operations; and o changes in general economic conditions. These and other factors have been discussed in more detail in the Company's periodic reports, including its Annual Report on Form 10-K for the fiscal year ended September 30,1999. 1 On March 20, 2000 we elected not to make interest payments due under our senior credit agreement. We are also in violation of certain covenants under our senior credit agreement and certain of our senior subordinated notes. We have begun discussions with our lenders of our senior credit agreement to revise our capital structure. We have been granted a forbearance period while discussions on an overall restructuring take place. Under the forbearance agreement, the majority of the senior creditors agreed to refrain from accelerating the senior loans or exercising other remedies against us arising from the existence of certain defaults, including non-payment of principal and interest. During the initial forbearance period we have not made scheduled interest and principal payments under our senior credit agreement or interest payments under certain of our senior subordinated notes. There can be no assurances that the senior lenders or holders of senior subordinated notes will approve any amendment or restructuring of the senior credit agreement or the senior subordinated notes. If the senior lenders or holders of senior subordinated notes accelerate the obligations under the agreements, such events would have a material adverse effect on our liquidity and financial position. Under such circumstances, our financial position would necessitate the development of an alternative financial structure. Considering the limited financial resources and the existence of certain defaults, there can be no assurance that we would succeed in formulating and consummating an acceptable alternative financial structure. In addition, in light of the Company's current financial condition and the existence of certain defaults, the Company may need to seek protection under federal bankruptcy law. 2 Part I: FINANCIAL INFORMATION Item 1: Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data)
March 31, September 30, 2000 1999 ----------- ------------ Assets Current assets: Cash and equivalents $ 50,855 $ 12,397 Investments in marketable securities 30,009 24,599 Accounts receivable, net of allowance for doubtful accounts 471,142 370,472 Inventory 59,428 63,369 Prepaid expenses and other current assets 59,532 46,964 ----------- ----------- Total current assets 670,966 517,801 ----------- ----------- Property, plant, and equipment, net 1,215,853 612,301 Notes receivable and other investments 43,948 40,075 Other long-term assets 146,803 112,978 Investments in unconsolidated affiliates 21,151 180,882 Goodwill and other intangibles, net 1,438,351 965,877 ----------- ----------- Total assets $ 3,537,072 $ 2,429,914 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Current installments of long-term debt $ 2,191,664 $ 37,126 Accounts payable and accrued expenses 298,806 244,971 ----------- ----------- Total current liabilities 2,490,470 282,097 ----------- ----------- Long-term debt 158,165 1,484,510 Deferred income taxes 67,633 13,827 Deferred gain and other long-term liabilities 88,858 61,590 Minority interest 169,976 - Redeemable preferred stock 429,793 - Shareholders' equity: Series G Cumulative Convertible Preferred Stock, par $.01, authorized 5,000,000 shares, 589,781 and 590,253 issued and outstanding at March 31, 2000 and September 30, 1999, respectively 6 6 Common stock, par $.02, authorized 60,000,000 shares, issued and outstanding 48,652,362 and 48,640,262 at March 31, 2000; 36,145,678 and 36,133,578 at September 30, 1999 748 723 Additional paid-in capital 803,426 753,452 Accumulated deficit (670,735) (165,620) Accumulated other comprehensive loss (1,025) (428) Treasury stock, at cost (243) (243) ----------- ----------- Total shareholders' equity 132,177 587,890 ----------- ----------- Total liabilities and shareholders' equity $ 3,537,072 $ 2,429,914 =========== ===========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements 3 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Operations (in thousands, except share and per share data)
Three months ended Six months ended March 31 March 31 -------------------------- --------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ------------ Net revenues: Pharmacy and medical supply services $ 232,942 $ 231,901 $ 456,849 $ 468,118 Inpatient services 331,084 175,801 657,411 351,833 Other revenue 40,817 56,917 77,467 123,872 ----------- ----------- ----------- ----------- Total net revenues 604,843 464,619 1,191,727 943,823 ----------- ----------- ----------- ----------- Operating expenses: Operating expenses 531,313 402,708 1,044,727 810,758 Debt restructuring and other charges 36,393 9,701 44,113 9,701 Multicare joint venture restructuring charge - - 420,000 - Depreciation and amortization 29,037 18,759 58,155 36,566 Lease expense 9,486 6,619 19,013 12,986 Interest expense, net 56,726 28,457 109,502 55,780 ----------- ----------- ----------- ----------- Income (loss) before income taxes, minority interest, equity in net loss of unconsolidated affiliates, extraordinary items and cumulative effect of an accounting change (58,112) (1,625) (503,783) 18,032 Income tax expense (benefit) (8,455) 572 (15,735) 7,950 ----------- ----------- ----------- ----------- Income (loss) before minority interest, equity in net loss of unconsolidated affiliates, extraordinary items and cumulative effect of an accounting change (49,657) (2,197) (488,048) 10,082 Minority interest 6,100 - 13,027 - Equity in net loss of unconsolidated affiliates - (4,259) - (5,151) ----------- ----------- ----------- ----------- Income (loss) before extraordinary items and cumulative effect of accounting change (43,557) (6,456) (475,021) 4,931 Extraordinary item, net of tax - (301) - (2,100) Cumulative effect of accounting change - - (10,412) - ----------- ----------- ----------- ----------- Net income (loss) (43,557) (6,757) (485,433) 2,831 Preferred stock dividends 11,375 4,802 19,681 9,713 ----------- ----------- ----------- ----------- Loss attributed to common shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882) =========== =========== =========== =========== Per common share data: Basic Loss before extraordinary items and cumulative effect of accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14) Net loss $ (1.13) $ (0.33) $ (11.10) $ (0.20) Weighted average shares of common stock 48,640,162 35,218,519 45,498,085 35,217,109 ----------- ----------- ----------- ----------- Diluted Loss before extraordinary items and cumulative effect of accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14) Net loss $ (1.13) $ (0.33) $ (11.10) $ (0.20) Weighted average shares of common stock 48,640,162 35,218,519 45,498,085 35,217,109 ----------- ----------- ----------- -----------
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements 4 Genesis Health Ventures, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands)
Six months ended March 31 ----------------------------- 2000 1999 ----------- -------- Cash flows from operating activities: Net income (loss) $ (485,433) $ 2,831 Net charges included in operations not requiring funds 500,948 45,170 Changes in assets and liabilities excluding the effects of acquisitions Accounts receivable (9,338) (34,015) Accounts payable and accrued expenses (46,271) (20,857) Other, net 6,588 (1,253) ---------- ------- Net cash used in operations (33,506) (8,124) ---------- ------- Cash flows from investing activities: Purchase of marketable securities (6,007) - Proceeds on maturity or sale of marketable securities - 2,708 Capital expenditures (27,958) (34,159) Payments for acquisitions, net of cash acquired - (10,787) (Investments in) and proceeds from unconsolidated affiliates 1,706 (15,826) Notes receivable and other investment, and other long-term asset additions, net (5,676) (4,423) ---------- ------- Net cash used in investing activities (37,935) (62,487) ---------- ------- Cash flows from financing activities: Net borrowings under working capital revolving credit facilities 89,868 90,000 Repayment of long-term debt and payment of sinking fund requirements (38,962) (131,240) Proceeds from issuance of long-term debt 10,000 123,050 Proceeds from issuance of common stock 50,000 - Preferred stock dividends paid - (5,988) Debt issuance and debt restructuring costs (4,974) (3,088) ---------- ------- Net cash provided by financing activities 105,932 72,734 ---------- ------- Net increase in cash and equivalents 34,491 2,123 Cash and equivalents Beginning of period 16,364 4,902 ---------- ------- End of period $ 50,855 $ 7,025 ========== =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements 5 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced significant losses and has a working capital deficit of approximately $1,800,000,000 at March 31, 2000 due primarily to the classification of certain senior and senior subordinated debt as a current liability resulting from the Company's violation of certain financial covenants described more fully in footnote 2. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 1999. The information furnished is unaudited but reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results expected for the full year. Certain prior period balances have been reclassified to conform with the current period presentation. 2. Certain Significant Risks and Uncertainties The following information is provided in accordance with the AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties." Liquidity and Going Concern Assumption The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern with the realization of the value of assets and the settlement of liabilities and commitments in the normal course of business. The Company has experienced significant losses and has a working capital deficit of $1,800,000,000, primarily due to the classification of certain senior and senior subordinated debt as a current liability as a result of the Company's violation of certain covenants under the Genesis Credit Facility and the Multicare Credit Facility (defined in footnote 3) as well as certain of the Genesis Notes (defined in footnote 3) as a result of the nonpayment of interest and principal under the Genesis Credit Facility and the Multicare Credit Facility, and the nonpayment of interest under certain of the Genesis Notes. In addition, the Company has received default notices from ElderTrust, a real estate investment trust, alleging certain payment and nonpayment related defaults concerning certain mortgage loans and operating leases. Management has begun discussions with the Company's lenders under the Genesis and Multicare Credit Facilities and certain holders of the Genesis Notes and the Multicare Notes to revise the capital structures of the respective companies. Genesis and Multicare have been granted forbearance periods while discussions on their respective restructurings take place. Under the forbearance agreements, the senior creditors have, subject to certain conditions, refrained from accelerating the senior loans or exercising other remedies against Genesis and Multicare. During the forbearance periods, Genesis and Multicare have not made scheduled interest and principal payments under the Genesis and Multicare Credit Facilities. As a result of the uncertainty related to the covenant defaults and corresponding remedies, amounts outstanding under the Multicare and Genesis Credit Facilities and the Genesis Notes and the Multicare Notes have been classified as a current liability at March 31, 2000. The forbearance periods for both Genesis and Multicare expire on May 19, 2000. The Company is in discussions to extend the forbearance periods. No assurance can be given that the forbearance periods will be extended. There can be no assurances that the senior lenders or holders of the Genesis Notes or Multicare Notes will approve any amendment or restructuring of the Genesis and / or Multicare Credit Facilities or the Genesis Notes and / or the Multicare Notes. The unaudited condensed consolidated financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty related to the covenant defaults and corresponding remedies. 6 If the senior lenders or holders of the Genesis Notes and / or the Multicare Notes accelerate the obligations under the agreements, such events would have a material adverse effect on the Company's liquidity and financial position. Under such circumstances, the financial position of the Company would necessitate the development of an alternative financial structure. Considering the Company's limited financial resources and the existence of certain defaults, there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial structure. Revenue Sources The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long term care facilities which utilize our specialty medical services. The healthcare industry is experiencing the effects of the federal and state governments' trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by the Company. In recent years, several significant actions have been taken with respect to Medicare and Medicaid reimbursement, including the following: o the adoption of the Medicare Prospective Payment System pursuant to the Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget Refinement Act, and o the repeal of the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities. While the Company has prepared certain estimates of the impact of the above changes, it is not possible to fully quantify the effect of recent legislation, the interpretation or administration of such legislation or any other governmental initiatives on its business. Accordingly, there can be no assurance that the impact of these changes will not be greater than estimated or that any future healthcare legislation will not adversely affect the Company's business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company's financial condition and results of operations may be affected by the reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. 3. Long-Term Debt and Liquidity Genesis Credit Facility Genesis entered into a fourth amended and restated credit agreement on August 20, 1999 pursuant to which the lenders amended and restated the credit agreement under which the lenders provided Genesis and its subsidiaries (excluding Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit Facility") for the purpose of: refinancing and funding interest and principal payments of certain existing indebtedness; funding permitted acquisitions; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of transactions. The fourth amended and restated credit agreement made the financial covenants for certain periods less restrictive, required minimum asset sales, increased the Applicable Margin (defined below), provided the lenders of the Genesis Credit Facility a collateral interest in certain real and personal property of the Company, and generally reallocated the proceeds thereof among the Tranche II Facility (defined below), the Genesis Revolving Facility (defined below) and the Genesis Term Loans (defined below) and permitted the restructuring of the Put/Call Agreement, as defined. Additionally, the fourth amended and restated credit agreement provides for $40,000,000 of additional borrowing capacity, (the "Tranche II Facility") available to the Company beginning in December 1999. 7 The Genesis Credit Facility consists of three term loans with original balances of $200,000,000 each (collectively, the "Genesis Term Loans"), and a $650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a $40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly installments through 2005. The Genesis Term Loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $110,445,000 at March 31, 2000 (the "Genesis Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $151,131,000 at March 31, 2000 (the "Genesis Tranche B Term Facility"); and (iii) an original eight year term loan maturing in June 2005 with an outstanding balance of $151,378,000 at March 31, 2000 (the "Genesis Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding balance of $645,834,000 (excluding letters of credit) at March 31, 2000, becomes payable in full on September 30, 2003. At March 31, 2000, the outstanding balance of the Tranche II Facility was $40,000,000. The aggregate outstanding balance of the Genesis Credit Facility at March 31, 2000 is classified as a current liability. The Genesis Credit Facility is secured by a first priority security interest in all of the stock, partnership interests and other equity of all of Genesis' present and future subsidiaries (including Genesis ElderCare Corp.) other than the stock of Multicare and its subsidiaries, and also by first priority security interests in substantially all personal property, excluding inventory, including accounts receivable, equipment and general intangibles. Mortgages on substantially all of Genesis' subsidiaries' real property were also granted. Loans under the Genesis Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Applicable Margin") that is dependent upon a certain financial ratio test. Loans under the Genesis Tranche A Term Facility and Genesis Revolving Facility have an Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans. Loans under the Genesis Tranche B Term Facility have an Applicable Margin of 1.75% for Prime Rate loans and 3.50% for LIBO Rate loans. Loans under the Genesis Tranche C Term Facility have an Applicable Margin of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans. Subject to meeting certain financial ratios, the above referenced interest rates are reduced. The senior creditors agreed during the forbearance period to waive the imposition of the Default Rate. However, effective with the default under the Genesis Credit Facility, the Company is no longer entitled to elect a LIBO Rate. The Genesis Credit Facility contains a number of covenants that, among other things, restrict the ability of Genesis and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Genesis and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Genesis and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Genesis to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. 8 Multicare Credit Facility Multicare entered into a fourth amended and restated credit agreement on August 20, 1999 (the "Multicare Credit Facility") which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Multicare Tranche A Term Facility (defined below) and Multicare Revolving Facility (defined below), permitted the restructuring of the Put/Call Agreement, increased the interest rates applying to the Multicare Term Loans (defined below) and the Multicare Revolving Facility, and increased the level of management fee Multicare may defer from two percent to four percent (on an annualized basis) in any fiscal year. The Multicare Credit Facilities consist of three term loans with an aggregate original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The Multicare Term Loans amortize in quarterly installments through 2005. The loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $139,301,000 at March 31, 2000 (the "Multicare Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $145,893,000 at March 31, 2000 (the "Tranche B Term Facility"); and (iii) and an original eight year term loan maturing in June 2005 with an outstanding balance of $48,382,000 at March 31, 2000 (the "Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an outstanding balance of $123,534,000 at March 31, 2000, becomes payable in full on September 30, 2003. The aggregate outstanding balance of the Multicare Credit Facility at March 31, 2000 is classified as a current liability. The Multicare Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Multicare Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, an Annual Applicable Margin that is dependent upon a certain financial ratio test. Effective with the Amendment on August 20, 1999, loans under the Multicare Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; loans under the Multicare Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. The senior creditors agreed during the forbearance period to waive the imposition of the Default Rate. However, effective with the default under the Multicare Credit Facility, the Company is no longer entitled to elect a LIBO Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%; loans under the Multicare Tranche B Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.5%; loans under the Multicare Revolving Credit Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%. The Company anticipates selling the assets of 14 eldercare centers in Ohio for approximately $36,000,000 in accordance with a signed letter of intent. All net proceeds of the disposition of assets located in Ohio are expected to be applied against the Multicare Credit Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held by each applicable lender. There can be no assurances that any such sales of assets can be consummated. 9 The Multicare Credit Facility contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to: dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Multicare to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. Other Indebtedness Genesis has outstanding an aggregate of $370,000,000 of Senior Subordinated Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%. Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the Multicare Notes is payable semi-annually. The aggregate outstanding balance of the Genesis Notes and the Multicare Notes at March 31, 2000 is classified as a current liability. Certain of these and other of Genesis' and Multicare's outstanding loans contain covenants which, without the prior consent of the lenders, limit certain of Genesis' and Multicare's activities. Such covenants contain limitations relating to the merger or consolidation of Genesis or Multicare and Genesis' and Multicare's ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, certain of Genesis and Multicare's outstanding loans require that Genesis and Multicare maintain certain minimum levels of cash flow and debt service coverage, and must maintain certain ratios of liabilities to net worth. Under certain of these loans, Genesis is restricted from paying cash dividends on the Common Stock, unless certain conditions are met. Genesis has not declared or paid any cash dividends on its Common Stock since its inception. 4. Debt Restructuring and Other Charges In connection with the potential debt restructuring, the Company incurred during the quarter ended March 31, 2000 legal, bank, accounting and other professional fees of approximately $5,000,000. As a result of the non-payment of interest under the Genesis Credit Facility, certain provisions under existing interest rate swap arrangements with Citibank were triggered. Citibank notified Genesis that they have elected to force early termination of the interest rate swap arrangements, and have asserted a $28,300,000 obligation. These charges are reflected in the consolidated statement of operations as debt restructuring and other charges. During the quarter ended March 31, 2000, the Company decided to close an underperforming 130 bed eldercare center resulting in a charge of approximately $3,100,000 for certain closure costs and impaired assets of that center. During the quarter ended March 31, 1999, the Company closed a 120 bed leased center resulting in a charge of approximately $9,700,000 consisting of the present value of future lease payments through the end of the lease term, a residual lease obligation to be funded at the end of the lease term, severance costs and other related closure costs. These charges are reflected in the consolidated statement of operations as debt restructuring and other charges. The Company also recorded a non-cash pre tax charge of $7,720,000 in the quarter ended December 31, 1999 for a stock option redemption program (the "Redemption Program") under which current Genesis employees and directors elected to surrender certain Genesis stock options for unrestricted shares of Genesis Common Stock. The Redemption Plan was approved by shareholder vote at the Company's 2000 Annual Meeting. As a result of the Company's financial condition and other considerations, the Company determined not to proceed with the Redemption Program. The elections made by optionees would have resulted in the redemption of approximately 4,600,000 stock options in exchange for approximately 4,000,000 shares of Genesis common stock. 10 5. Multicare Transaction and its Restructuring In October 1997, Genesis, The Cypress Group (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors". In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of The Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. pursuant to which, among other things, Genesis had the option to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis ElderCare Corp. common stock at a price determined pursuant to the Put/Call Agreement. On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Genesis also entered into an asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as defined below) and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 (the "Therapy Purchase") and a stock purchase agreement (the "Pharmacy Purchase Agreement") with Multicare and certain subsidiaries pursuant to which Genesis acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Purchase"). The Company completed the Pharmacy Purchase effective January 1, 1998. The Company completed the Therapy Purchase in October 1997. Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement; Issuance of Preferred Stock Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for: o 24,369 shares of Genesis' Series H Senior Convertible Participating Cumulative Preferred Stock (the "Series H Preferred"), which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp.; and o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock, (the "Series I Preferred") which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp. 11 In connection with the restructuring transaction, the restrictions in the Put/Call Agreement related to Genesis' right to take certain corporate actions, including its ability to sell all or a portion of its pharmacy business, were terminated. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. Investment in Genesis Cypress and TPG invested in the aggregate, directly or through affiliated investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of Genesis common stock and a ten year warrant to purchase 2,000,000 shares of Genesis common stock at an exercise price of $5.00 per share. Registration Rights Subject to limitations contained in the Restructuring Agreement, the holders of the Genesis common stock, warrants, Series H Preferred Stock and Series I Preferred Stock issued in connection with the restructuring transaction and all securities issued or distributed in respect of these securities have the right to register these securities under the Securities Act. Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. Irrevocable Proxy Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an irrevocable power of attorney directing Genesis to cast for, against or as an abstention in the same proportion as the other Genesis voting securities are cast, the number of shares of securities of Genesis so that Cypress, TPG and Nazem together will not have the right to vote more than 35% of the total voting power of Genesis in connection with any vote other than a vote relating to an amendment to Genesis' articles of incorporation to amend, modify or change the terms of any class or series of preferred stock. This power of attorney will terminate upon the existence of the circumstances that would cause the standstill to terminate as described below. 12 Directors of Genesis Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting jointly, or in the event that only one of Cypress and TPG then owns or has the right to acquire Genesis common stock, Cypress or TPG, as applicable, are entitled to designate a number of directors of Genesis representing at least 23% of the total number of directors constituting the full board of directors of Genesis. However, for so long as the total number of directors constituting the full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only entitled to designate two directors on the Genesis board of directors. Cypress and TPG have this right to designate directors so long as they own any combination of Genesis voting securities or securities convertible into Genesis voting securities constituting more that 10% of Genesis' total voting power. For this purpose, the Series I Preferred Stock and the non-voting common stock issued upon conversion of the Series I Preferred Stock will be considered voting securities. For so long as Cypress and/or TPG have the right to designate directors on the Genesis board of directors, Genesis shall not, without the consent of at least two of the Cypress/TPG designated directors: o enter into any transaction or series of transactions which would constitute a change in control, as defined in the Restructuring Agreement; or o engage in a "going private" transaction. Pre-emptive Rights As a result of the restructuring transaction, Cypress and TPG each have a right, subject to the limitations contained in the Restructuring Agreement, to participate in future offerings of any shares of, or securities exchangeable, convertible or exercisable for any shares of any class of Genesis' capital stock. Standstill The Sponsors have agreed that, subject to certain termination provisions, neither they nor their affiliates will, without Genesis' prior written consent, either alone or as part of a group, acquire any voting securities of Genesis, except for the voting securities to be issued in the restructuring transaction and pursuant to stock splits, stock dividends or other distributions or offerings made available to holders of Genesis voting securities generally. Accounting Effects Prior to the Multicare restructuring transaction, Genesis accounted for its investment in Multicare using the equity method of accounting. Upon consummation of the restructuring transaction, Genesis consolidated the financial results of Multicare since Genesis has managerial, operational and financial control of Multicare under the terms of the Restructuring Agreement. Accordingly, Multicare's assets, liabilities, revenues and expenses are consolidated at their recorded historical amounts and the financial impact of transactions between Genesis and Multicare are eliminated in consolidation. The non-Genesis shareholders' remaining 56.4% interest in Multicare is carried as minority interest based on their proportionate share of Multicare's historical book equity. For so long as there is a minority interest in Multicare, the minority shareholders' proportionate share of Multicare's net income or loss will be recorded through adjustment to minority interest. In connection with the restructuring transaction, Genesis recorded a non-cash charge of approximately $420,000,000 representing the estimated cost to terminate the Put in consideration for the issuance of the Series H Preferred and Series I Preferred. The cost to terminate the Put was estimated based upon the Company's assessment that no incremental value was realized by Genesis as a result of the changes in the equity ownership structure of Multicare brought about by the restructuring of the Multicare joint venture. 13 The following unaudited pro forma statement of operations information gives effect to the Multicare joint venture restructuring had it occurred on October 1, 1998, after giving effect to certain adjustments, including the elimination of intercompany transactions, the recording of minority interest, the issuance of common stock, the recording of preferred stock dividends, the repayment of debt with proceeds from the issuance of common stock and related income tax effects. The unaudited pro forma financial information has been prepared to reflect the consolidation of the financial results of Multicare. Accordingly, Multicare's revenues and expenses are presented at their recorded historical amounts and the financial impact of all transactions between Genesis and Multicare are eliminated in consolidation. The pro forma financial information does not include the $420,000,000 non-cash charge representing the cost estimated to terminate the Multicare put. This charge is a direct result of the Multicare joint venture restructuring. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the transaction occurred at the beginning of the period presented.
(In thousands, except per common share data) Six Months Ended Unaudited Pro Forma Statement of Operations Information: March 31, 1999 -------------- Total net revenue $ 1,217,255 Loss before extraordinary items (16,352) Net loss (18,452) Loss per common share, before extraordinary items, diluted (0.34) Loss per common share, diluted $ (0.39)
14 7. Loss Per Share The following table sets forth the computation of basic and diluted loss attributed to common shares (amounts are in thousands except per share data):
Three Three Six Six Months Months Months Months Ended Ended Ended Ended March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999 ---------------- --------------- ---------------- --------------- Loss Per Share: Loss before extraordinary items and cumulative effect of accounting change $ (54,932) $ (11,258) $ (494,702) $ (4,782) Extraordinary items - (301) - (2,100) Cumulative effect of accounting change - - (10,412) - --------- --------- ---------- -------- Loss attributed to common shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882) --------- --------- ---------- -------- Weighted average shares 48,640 35,219 45,498 35,217 --------- --------- ---------- -------- Loss per share before extraordinary items and cumulative effect of accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14) Extraordinary items - (0.01) - (0.06) Cumulative effect of accounting change - - (0.23) - --------- --------- ---------- -------- Loss per share $ (1.13) $ (0.33) $ (11.10) $ (0.20) --------- --------- ---------- -------- Diluted Loss Per Share: Loss before extraordinary items and cumulative effect of accounting change $ (54,932) $ (11,258) $ (494,702) $ (4,782) Extraordinary items - (301) - (2,100) Cumulative effect of accounting change - - (10,412) - --------- --------- ---------- -------- Loss attributed to common shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882) --------- --------- ---------- -------- Weighted average shares 48,640 35,219 45,498 35,217 --------- --------- ---------- -------- Loss per share before extraordinary items and cumulative effect of accounting change $ (1.13) $ (0.32) $ (10.87) $ (0.14) Extraordinary items - (0.01) - (0.06) Cumulative effect of accounting change - - (0.23) - --------- --------- ---------- -------- Loss per share $ (1.13) $ (0.33) $ (11.10) $ (0.20) --------- --------- ---------- --------
The operating results for the quarter and six months ended March 31, 1999 have been restated to increase non-cash preferred stock dividends by $482,000 and $976,000, respectively, to adjust the accrual for the increasing rate dividend on the Series G Preferred Stock on a straight-line basis over the term of this series. 15 8. Comprehensive Loss The following table sets forth the computation of comprehensive loss (amounts in the table are in thousands):
Three Three Six Six Months Months Months Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 2000 1999 2000 1999 ---------- ---------- ----------- --------- Loss attributed to common shareholders $ (54,932) $ (11,559) $ (505,114) $ (6,882) Unrealized loss on marketable securities (336) (354) (597) (547) --------- --------- ---------- -------- Total comprehensive loss $ (55,268) $ (11,913) $ (505,711) $ (7,429) --------- --------- ---------- --------
Accumulated other comprehensive income (loss), which is composed of net unrealized gains and losses on marketable securities, was ($1,025,000) and $137,000 at March 31, 2000 and 1999, respectively. 9. Cumulative Effect of Accounting Change Effective October 1, 1999, the Company adopted the provisions of the AICPA's Statement of Position 98-5, "Reporting on the Costs of Start-up Activities", (SOP 98-5) which requires the costs of start-up activities be expensed as incurred, rather than capitalized and subsequently amortized. The adoption of SOP 98-5 resulted in the write-off of $10,412,000, net of tax, of unamortized start-up costs and is reflected as a cumulative effect of accounting change. 10. Segment Information The Company has two reportable segments: (1) Pharmacy and medical supplies services and (2) Inpatient services. The Company provides pharmacy and medical supply services through its NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply service revenues are institutional pharmacy revenues, which include the provision of infusion therapy, medical supplies and equipment provided to eldercare centers Genesis operates, as well as to independent healthcare providers by contract. The Company provides these services through 61 institutional pharmacies (one is jointly-owned) and 22 medical supply distribution centers located in its various market areas. In addition, the Company operates 33 community-based pharmacies which are located in or near medical centers, hospitals and physician office complexes. The community-based pharmacies provide prescription and over-the-counter medications and certain medical supplies, as well as personal service and consultation by licensed professional pharmacists. Approximately 91% of the sales attributable to all pharmacy operations in Fiscal 1999 were generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by the Company, including the jointly owned Multicare centers. The Company includes in inpatient service revenue all room and board charges and ancillary service revenue for its eldercare customers at 220 eldercare centers owned and leased by Genesis and Multicare. The centers offer three levels of care for their customers: skilled, intermediate and personal. The accounting policies of the segments are the same as those of the Company. All intersegment sales prices are market based. The Company evaluates performance of its operating segments based on income before interest, income taxes, depreciation, amortization, rent and nonrecurring items. 16 Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column represents operating information of business units below the prescribed quantitative thresholds. These business units derive revenues from the following services: rehabilitation therapy, management services, capitation fees, consulting services, homecare services, physician services, transportation services, diagnostic services, hospitality services, group purchasing fees and other healthcare related services. In addition, the "Other" column includes the elimination of intersegment transactions.
Pharmacy and Medical Supply Inpatient (in thousands) Services Services Other Total - ------------------ ------------ ---------- --------- ------------ Three months ended March 31, 2000 - ------------------ Revenue from external customers $ 232,942 $ 331,084 $ 40,817 $ 604,843 Revenue from intersegment customers 25,448 - 45,558 71,006 Operating income (1) 24,528 38,118 10,884 73,530 Total assets 1,088,689 1,797,492 650,891 3,537,072 ---------- ---------- --------- ------------ Three months ended March 31, 1999 - ------------------ Revenue from external customers 231,901 175,801 56,917 464,619 Revenue from intersegment customers 13,732 - 18,804 32,536 Operating income (1) 31,601 27,118 3,192 61,911 Total assets $1,089,427 $ 853,220 $ 735,568 $ 2,678,215 ---------- ---------- --------- ------------
Pharmacy and Medical Supply Inpatient (in thousands) Services Services Other Total - ------------------ ------------ ---------- --------- ------------ Six months ended March 31, 2000 - ----------------- Revenue from external customers $ 456,849 $ 657,411 $ 77,467 $ 1,191,727 Revenue from intersegment customers 51,769 - 85,857 137,626 Operating income (1) 50,388 77,326 19,286 147,000 Total assets 1,088,689 1,797,492 650,891 3,537,072 ---------- ---------- --------- ------------ Six months ended March 31, 1999 - ----------------- Revenue from external customers 468,118 351,833 123,872 943,823 Revenue from intersegment customers 28,254 - 39,164 67,418 Operating income (1) 65,350 54,773 12,942 133,065 Total assets $1,089,427 $ 853,220 $ 735,568 $ 2,678,215 ---------- ---------- --------- ------------
(1) Operating income is defined as income before interest, income taxes, depreciation, amortization, rent and nonrecurring items. The Company's segment information does not include an allocation of overhead costs, which are between 3% - 4% of consolidated net revenues. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Genesis Health Ventures, Inc. was incorporated in May 1985 as a Pennsylvania corporation. As used herein, unless the context otherwise requires, "Genesis," the "Company," "we," "our," or "us" refers to Genesis Health Ventures, Inc. and Subsidiaries. Since we began operations in July 1985, we have focused our efforts on providing an expanding array of specialty medical services to elderly customers. We generate revenues primarily from two sources: pharmacy and medical supply services, and inpatient services. However, we also derive revenue from other sources. We provide pharmacy and medical supply services through our NeighborCare(R) pharmacy subsidiaries. Included in pharmacy and medical supply service revenues are institutional pharmacy revenues, which include the provision of infusion therapy, medical supplies and equipment provided to eldercare centers operated by Genesis, as well as to independent healthcare providers by contract. We provide these services through 61 institutional pharmacies (one is jointly-owned) and 22 medical supply distribution centers located in our various market areas. In addition, we operate 33 community-based pharmacies which are located in or near medical centers, hospitals and physician office complexes. The community-based pharmacies provide prescription and over-the-counter medications and certain medical supplies, as well as personal service and consultation by licensed professional pharmacists. NeighborCare purchases substantially all of its pharmaceuticals, approximately $540,000,000 annually, through Cardinal Health, Inc. under a five year contract which commenced in May of 1999. NeighborCare has other sources of supply available to it and has not experienced difficulty obtaining pharmaceuticals or other supplies used in the conduct of its business. Approximately 91% of the sales attributable to all pharmacy operations in the twelve months ended September 30, 1999 were generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by us, including the jointly owned and consolidated Multicare centers. We include in inpatient service revenue all room and board charges and ancillary service revenue for our eldercare customers at 220 eldercare centers owned and leased by Genesis and Multicare. We include the following in other revenues: rehabilitation therapy, management fees, capitation fees, consulting services, homecare services, physician services, transportation services, diagnostic services, hospitality services, group purchasing fees and other healthcare related services. Certain Transactions and Events Liquidity and Going Concern Assumption The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern with the realization of the value of assets and the settlement of liabilities and commitments in the normal course of business. The Company has experienced significant losses and has a working capital deficit of $1,800,000,000 at March 31, 2000 due primarily to the classification of certain senior and senior subordinated debt as a current liability resulting from the Company's violation of certain covenants under the Genesis Credit Facility and the Multicare Credit Facility as well as certain of the Genesis Notes as a result of the nonpayment of interest and principal under the Genesis Credit Facility and the Multicare Credit Facility, and the nonpayment of interest under certain of the Genesis Notes. In addition, the Company has received default notices from ElderTrust, a real estate investment trust, alleging certain payment and nonpayment related defaults concerning certain mortgage loans and operating leases. Management has begun discussions with the Company's lenders under the Genesis and Multicare Credit Facilities and certain holders of the Genesis Notes and the Multicare Notes to revise the capital structures of the respective companies. Genesis and Multicare have been granted forbearance periods while discussions on their respective restructurings take place. Under the forbearance agreements, the senior creditors have, subject to certain conditions, refrained from accelerating the senior loans or exercising other remedies against Genesis and Multicare. During the forbearance periods, Genesis and Multicare have not made scheduled interest and principal payments under the Genesis and Multicare Credit Facilities. As a result of the uncertainty related to the covenant defaults and corresponding remedies, amounts outstanding under the Multicare and Genesis Credit Facilities and the Genesis Notes and the Multicare Notes have been classified as a current liability at March 31, 2000. The forbearance periods for both Genesis and Multicare expire on May 19, 2000. The Company is in discussions to extend the forbearance periods. No assurance can be given that the forbearance periods will be extended. 18 There can be no assurances that the senior lenders or holders of the Genesis Notes or Multicare Notes will approve any amendment or restructuring of the Genesis and / or Multicare Credit Facilities or the Genesis Notes and / or the Multicare Notes. The unaudited condensed consolidated financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty related to the covenant defaults and corresponding remedies. If the senior lenders or holders of the Genesis Notes and / or the Multicare Notes accelerate the obligations under the agreements, such events would have a material adverse effect on the Company's liquidity and financial position. Under such circumstances, the financial position of the Company would necessitate the development of an alternative financial structure. Considering the Company's limited financial resources and the existence of certain defaults, there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial structure. Multicare Transaction and its Restructuring In October 1997, Genesis, The Cypress Group (together with its affiliates, "Cypress"), TPG Partners II, L.P., (together with its affiliates, "TPG") and Nazem, Inc. ("Nazem") acquired all of the issued and outstanding common stock of Genesis ElderCare Corp., a Delaware corporation. Cypress, TPG and Nazem purchased 210,000, 199,500 and 10,500 shares of Genesis ElderCare Corp. common stock, respectively, representing in the aggregate approximately 56.4% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $420,000,000. Genesis purchased 325,000 shares of Genesis ElderCare Corp. common stock, representing approximately 43.6% of the issued and outstanding common stock of Genesis ElderCare Corp., for an aggregate purchase price of $325,000,000. Cypress, TPG and Nazem are sometimes collectively referred to herein as the "Sponsors". In October 1997, as a result of a tender offer and a merger transaction, Genesis ElderCare Corp. acquired 100% of the outstanding shares of common stock of The Multicare Companies, Inc. ("Multicare"), making Multicare a wholly-owned subsidiary of Genesis ElderCare Corp. In connection with their investments in the common stock of Genesis ElderCare Corp., Genesis, Cypress, TPG and Nazem entered into a stockholders agreement dated as of October 9, 1997 (the "Multicare Stockholders Agreement"), and Genesis, Cypress, TPG and Nazem entered into a put/call agreement, dated as of October 9, 1997 (the "Put/Call Agreement") relating to their respective ownership interests in Genesis ElderCare Corp. pursuant to which, among other things, Genesis had the option to purchase (the "Call") Genesis ElderCare Corp. Common Stock held by Cypress, TPG and Nazem at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem had the option to purchase (the "Put") such Genesis ElderCare Corp. common stock at a price determined pursuant to the Put/Call Agreement. 19 On October 9, 1997, Genesis ElderCare Corp. and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis ElderCare Network Services manages Multicare's operations. Genesis also entered into an asset purchase agreement (the "Therapy Purchase Agreement") with Multicare (as defined below) and certain of its subsidiaries pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24,000,000 (the "Therapy Purchase") and a stock purchase agreement (the "Pharmacy Purchase Agreement") with Multicare and certain subsidiaries pursuant to which Genesis acquired all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50,000,000 (the "Pharmacy Purchase"). The Company completed the Pharmacy Purchase effective January 1, 1998. The Company completed the Therapy Purchase in October 1997. Restructuring On October 8, 1999, Genesis entered into a restructuring agreement with Cypress, TPG and Nazem (the "Restructuring Agreement") to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Amendment to Put/Call Agreement; Issuance of Preferred Stock Pursuant to the Restructuring Agreement, the Put under the Put/Call Agreement was terminated in exchange for: o 24,369 shares of Genesis' Series H Senior Convertible Participating Cumulative Preferred Stock, (the "Series H Preferred") which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp.; and o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock, (the "Series I Preferred") which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp. In connection with the restructuring transaction, the restrictions in the Put/Call Agreement related to Genesis' right to take certain corporate actions, including its ability to sell all or a portion of its pharmacy business, were terminated. In addition, the Call under the Put/Call Agreement was amended to provide Genesis with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by Genesis for $2,000,000 in cash at any time prior to the 10th anniversary of the closing date of the restructuring transaction. Investment in Genesis Cypress and TPG invested in the aggregate, directly or through affiliated investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of Genesis common stock and a ten year warrant to purchase 2,000,000 shares of Genesis common stock at an exercise price of $5.00 per share. Registration Rights Subject to limitations contained in the Restructuring Agreement, the holders of the Genesis common stock, warrants, Series H Preferred Stock and Series I Preferred Stock issued in connection with the restructuring transaction and all securities issued or distributed in respect of these securities have the right to register these securities under the Securities Act. 20 Amendment to Stockholders Agreement On November 15, 1999, the Multicare Stockholders Agreement was amended to: o provide that all shareholders will grant to Genesis an irrevocable proxy to vote their shares of common stock of Genesis ElderCare Corp. on all matters to be voted on by shareholders, including the election of directors; o provide that Genesis may appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors; o omit the requirement that specified significant actions receive the approval of at least one designee of each of Cypress, TPG and Genesis; o permit Cypress, TPG and Nazem and their affiliates to sell their Genesis ElderCare Corp. stock, subject to certain limitations; o provide that Genesis may appoint 100% of the members of the operating committee of the board of directors of Genesis ElderCare Corp.; and o eliminate all pre-emptive rights. Irrevocable Proxy Cypress, TPG and Nazem and their affiliated investment funds gave to Genesis an irrevocable power of attorney directing Genesis to cast for, against or as an abstention in the same proportion as the other Genesis voting securities are cast, the number of shares of securities of Genesis so that Cypress, TPG and Nazem together will not have the right to vote more than 35% of the total voting power of Genesis in connection with any vote other than a vote relating to an amendment to Genesis' articles of incorporation to amend, modify or change the terms of any class or series of preferred stock. This power of attorney will terminate upon the existence of the circumstances that would cause the standstill to terminate as described below. Directors of Genesis Pursuant to the terms of the Series H Preferred Stock, Cypress and TPG, acting jointly, or in the event that only one of Cypress and TPG then owns or has the right to acquire Genesis common stock, Cypress or TPG, as applicable, are entitled to designate a number of directors of Genesis representing at least 23% of the total number of directors constituting the full board of directors of Genesis. However, for so long as the total number of directors constituting the full board of directors of Genesis is nine or fewer, Cypress and/or TPG are only entitled to designate two directors on the Genesis board of directors. Cypress and TPG have this right to designate directors so long as they own any combination of Genesis voting securities or securities convertible into Genesis voting securities constituting more that 10% of Genesis' total voting power. For this purpose, the Series I Preferred Stock and the non-voting common stock issued upon conversion of the Series I Preferred Stock will be considered voting securities. For so long as Cypress and/or TPG have the right to designate directors on the Genesis board of directors, Genesis shall not, without the consent of at least two of the Cypress/TPG designated directors: o enter into any transaction or series of transactions which would constitute a change in control, as defined in the Restructuring Agreement; or o engage in a "going private" transaction. Pre-emptive Rights As a result of the restructuring transaction, Cypress and TPG each have a right, subject to the limitations contained in the Restructuring Agreement, to participate in future offerings of any shares of, or securities exchangeable, convertible or exercisable for any shares of any class of Genesis' capital stock. Standstill The Sponsors have agreed that, subject to certain termination provisions, neither they nor their affiliates will, without Genesis' prior written consent, either alone or as part of a group, acquire any voting securities of Genesis, except for the voting securities to be issued in the restructuring transaction and pursuant to stock splits, stock dividends or other distributions or offerings made available to holders of Genesis voting securities generally. 21 Accounting Effects Prior to the Multicare restructuring transaction, Genesis accounted for its investment in Multicare using the equity method of accounting. Upon consummation of the restructuring transaction, Genesis will consolidate the financial results of Multicare since Genesis will have managerial, operational and financial control of Multicare under the terms of the Restructuring Agreement. Accordingly, Multicare's assets, liabilities, revenues and expenses will be consolidated at their recorded historical amounts and the financial impact of transactions between Genesis and Multicare will be eliminated in consolidation. The non-Genesis shareholders' remaining 56.4% interest in Multicare will be carried as minority interest based on their proportionate share of Multicare's historical book equity. For so long as there is a minority interest in Multicare, the minority shareholders' proportionate share of Multicare's net income or loss will be recorded through adjustment to minority interest. In connection with the restructuring transaction, Genesis recorded a non-cash charge of approximately $420,000,000 representing the estimated cost to terminate the Put in consideration for the issuance of the Series H Preferred and Series I Preferred. The cost to terminate the Put was estimated based upon the Company's assessment that no incremental value was realized by Genesis as a result of the changes in the equity ownership structure of Multicare brought about by the restructuring of the Multicare joint venture. Results of Operations Three months ended March 31, 2000 compared to three months ended March 31, 1999 The Company's total net revenues for the quarter ended March 31, 2000 were $604,843,000 compared to $464,619,000 for the quarter ended March 31, 1999, an increase of $140,224,000 or 30%. Pharmacy and medical supply service revenue was $232,942,000 for the quarter ended March 31, 2000 versus $231,901,000 for the quarter ended March 31, 1999. Pharmacy and medical supply service revenues increased approximately $7,700,000 due to net revenue growth with external customers. This increase is offset by approximately $6,700,000 due to the consolidation of Multicare's results with those of Genesis in the March 2000 period and the resulting elimination of pharmacy and medical supply service revenues earned with the Multicare centers. Inpatient service revenue increased $155,283,000 or 88% to $331,084,000 from $175,801,000. Of this increase, approximately $159,642,000 is attributed to the consolidation of Multicare's inpatient revenues in the quarter ended March 31, 2000, approximately $1,900,000 is attributed to one additional calendar day in the March 31, 2000 quarter due to a leap year, and approximately $4,500,000 is attributed to volume growth in the Company's Medicare census. These increases are offset by reduced revenue of approximately $10,300,000 resulting from seven fewer eldercare centers in the March 31, 2000 quarter compared to the March 31, 1999 quarter, and approximately $3,300,000 is attributed to rate dilution in the Company's Medicare rate per patient day as a result of PPS. The remaining increase of approximately $2,800,000 is due to changes in other payor categories and rates. The Company's average Medicare rate per patient day for the quarter ended March 31, 2000 was approximately $288 compared to $312 for the quarter ended March 31, 1999. Total patient days increased 947,940 to 2,170,145 during the quarter ended March 31, 2000 compared to 1,222,205 during the comparable period last year. Of this increase, 1,020,464 patient days are attributed to the consolidation of Multicare's inpatient business in the quarter ended March 31, 2000, and 13,284 days are attributed to one additional calendar day in the March 31, 2000 quarter due to a leap year. These increases are offset by a reduction of 72,911 patient days resulting from seven fewer eldercare centers in the March 31, 2000 quarter compared to the March 31, 1999 quarter and the remaining decrease of 12,897 is the result of a decline in overall occupancy. Other revenues decreased approximately $16,100,000 from $56,917,000 to $40,817,000. Approximately $14,200,000 of the decline is attributed to the consolidation of Multicare's results with those of Genesis and the resulting elimination of management fee and other service related revenues with Multicare in the quarter ended March 31, 2000. Approximately $6,700,000 of this decline is attributed to the termination of a capitation contract in the Company's Chesapeake region. These declines are offset by increases in other revenue of approximately $4,800,000 attributed to growth in the Company's rehabilitation therapy business. 22 The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $567,706,000 for the quarter ended March 31, 2000 compared to $412,409,000 for the quarter ended March 31, 1999, an increase of $155,297,000 or 38%, of which approximately $112,900,000 is attributed to the consolidation of Multicare's results with those of Genesis, approximately $26,700,000 is attributed to an increase in certain charges described more fully in the next two paragraphs, approximately $5,200,000 is attributed to one additional calendar day in the quarter ended March 31, 2000 due to a leap year, and approximately $26,500,000 is attributed to growth in cost of sales and inflationary increases, principally labor related costs. These increases are offset by reduced operating expenses of approximately $6,700,000 attributed to a terminated capitation contract in the Company's Chesapeake region and $9,300,000 resulting from seven fewer eldercare centers operating in the March 31, 2000 quarter compared to the March 31, 1999 quarter. During the quarter ended March 31, 2000, the Company began discussions with its lenders under the Genesis and Multicare Credit Facilities to revise the Company's capital structure. During the discussion period, Genesis and Multicare did not make certain scheduled principal and interest payments under the Genesis and Multicare Credit Facilities or certain scheduled interest payments under certain of the Genesis senior subordinated debt agreements. In connection with the potential debt restructuring, the Company incurred during the quarter ended March 31, 2000 legal, bank, accounting and other professional fees of approximately $5,000,000. As a result of the nonpayment of interest under the Genesis Credit Facility, certain provisions under existing interest rate swap arrangements with Citibank were triggered. Citibank notified Genesis that they have elected to force early termination of the interest rate swap arrangements, and have asserted a $28,300,000 obligation. The professional fees and interest rate swap termination are reflected in the consolidated statement of operations as debt restructuring and other charges. During the quarter ended March 31, 2000, the Company decided to close an underperforming 130 bed eldercare center resulting in a charge of approximately $3,100,000 for certain closure costs and impaired assets of that center. During the quarter ended March 31, 1999, the Company closed a 120 bed leased center resulting in a charge of approximately $9,700,000 consisting of the present value of future lease payments through the end of the lease term, a residual lease obligation to be funded at the end of the lease term, severance costs and other related closure costs. These charges are reflected in the consolidated statement of operations as debt restructuring and other charges. In the quarter ended March 31, 2000, approximately $33,700,000 of revenue, and a corresponding amount of expense, was eliminated as a result of the consolidation of Genesis and Multicare. Depreciation and amortization expense increased $10,278,000, of which $9,497,000 is attributed to the consolidation of Multicare's results with those of Genesis. The remaining increase is principally attributed to incremental amortization of deferred financing costs, as well as incremental depreciation expense from capital expenditures made since March 31, 1999. Lease expense increased $2,867,000, of which $3,284,000 is attributed to the consolidation of Multicare's results with those of Genesis. This increase is offset by $955,000 attributed to six fewer eldercare centers leased during the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999, offset by normal increases in lease rates. Interest expense increased $28,269,000, of which $18,634,000 is attributed to the consolidation of Multicare's results with those of Genesis. The remaining increase in interest expense is primarily due to additional capital and working capital borrowings and an increase in the Company's weighted average borrowing rate. Minority interest of $6,100,000 recorded during the quarter ended March 31, 2000 principally represents Genesis' Multicare joint venture partners' 56.4% interest in the Multicare net loss for the period. 23 Preferred stock dividends increased $6,573,000 to $11,375,000 during the quarter ended March 31, 2000 compared to $4,802,000 during the quarter ended March 31, 1999. This increase is attributed to the issuance of Series H and Series I Preferred Stock in mid-November, 1999. The March 31, 1999 preferred stock dividends were restated, resulting in an increase of $482,000, to adjust the accrual for the increasing rate dividend on the Series G Preferred Stock on a straight-line basis over the term of that series. Six months ended March 31, 2000 compared to six months ended March 31, 1999 The Company's total net revenues for the six months ended March 31, 2000 were $1,191,727,000 compared to $943,823,000 for the six months ended March 31, 1999, an increase of $247,904,000 or 26%. Pharmacy and medical supply service revenues were $456,849,000 for the six months ended March 31, 2000 versus $468,118,000 for the six months ended March 31, 1999. Pharmacy and medical supply service revenues increased approximately $2,100,000 due to net revenue growth with external customers. This increase is offset by approximately $13,400,000 due to the consolidation of Multicare's results with those of Genesis in the March 2000 period and the resulting elimination of pharmacy and medical supply service revenues earned with the Multicare centers. Inpatient service revenue increased $305,578,000 or 87% to $657,411,000 from $351,833,000. Of this increase, approximately $316,615,000 is attributed to the consolidation of Multicare's inpatient revenues in the six months ended March 31, 2000, approximately $1,900,000 is attributed to one additional calendar day in the March 31, 2000 period due to a leap year, and approximately $9,700,000 is attributed to volume growth in the Company's Medicare census. These increases are offset by reduced revenue of approximately $19,400,000 resulting from seven fewer eldercare centers in the March 31, 2000 period compared to the March 31, 1999 period, and approximately $5,400,000 is attributed to rate dilution in the Company's Medicare rate per patient day as a result of PPS. The remaining increase of approximately $2,200,000 is due to shifts in other payor categories and rates. The Company's average Medicare rate per patient day for six months ended March 31, 2000 was approximately $289 compared to $308 for the six months ended March 31, 1999. Total patient days increased 1,907,452 to 4,380,984 during the six months ended March 31, 2000 compared to 2,473,532 during the comparable period last year. Of this increase, 2,049,602 patient days are attributed to the consolidation of Multicare's inpatient business in the six months ended March 31, 2000, and 13,284 days are attributed to one additional calendar day in the March 31, 2000 quarter due to a leap year. These increases are offset by a reduction of 130,304 patient days resulting from seven fewer eldercare centers in the March 31, 2000 period compared to the March 31, 1999 period and the remaining decrease of 25,130 is the result of a decline in overall occupancy. Other revenues decreased approximately $46,405,000 from $123,872,000 to $77,467,000. Approximately $5,300,000 of this decline is attributed to contraction in the Company's rehabilitation services business since the January 1, 1999 implementation of PPS by many of the Company's external rehabilitation customers. Approximately $29,500,000 of the decline is attributed to the consolidation of Multicare's results with those of Genesis and the resulting elimination of management fee and other service related revenues with Multicare in the six months ended March 31, 2000. Approximately $13,100,000 of this decline is attributed to the termination of a capitation contract in the Company's Chesapeake region. The remaining increase in other revenue of approximately $1,500,000 is attributed to the Company's other health care services business lines, principally the Company's rehabilitation therapy business. The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $1,088,840,000 for the six months ended March 31, 2000 compared to $820,459,000 for the six months ended March 31, 1999, an increase of $268,381,000 or 33%, of which approximately $226,500,000 is attributed to the consolidation of Multicare's results with those of Genesis, approximately $34,412,000 is attributed to an increase in certain charges described more fully in the next three paragraphs, approximately $4,500,000 is attributed to one additional calendar day in the quarter ended March 31, 2000 due to a leap year, approximately $1,300,000 is attributed to the Company's adoption of a new accounting principle that requires start-up costs be expensed when incurred, and approximately $32,200,000 is attributed to growth in cost of sales and inflationary increases, principally labor related costs. These increases are offset by reduced operating expenses of approximately $13,100,000 attributed to a terminated capitation contract in the Company's Chesapeake region and $17,400,000 resulting from seven fewer eldercare centers operating in the six months ended March 31, 2000 compared to the six months ended March 31, 1999. 24 During the quarter ended March 31, 2000, the Company began discussions with its lenders under the Genesis and Multicare Credit Facilities to revise the capital structures of the respective companies. During the discussion period, Genesis and Multicare did not make certain scheduled principal and interest payments under the Genesis and Multicare Credit Facilities or certain scheduled interest payments under certain Genesis senior subordinated debt agreements. In connection with the potential debt restructuring, the Company incurred during the quarter ended March 31, 2000 legal, bank, accounting and other professional fees of approximately $5,000,000. As a result of the nonpayment of interest under the Genesis Credit Facility, certain provisions under existing interest rate swap arrangements with Citibank were triggered. Citibank notified Genesis that they have elected to force early termination of the interest rate swap arrangements, and have asserted a $28,300,000 obligation. The professional fees and interest rate swap termination are reflected in the consolidated statement of operations as debt restructuring and other charges. During the quarter ended March 31, 2000, the Company decided to close an underperforming 130 bed eldercare center resulting in a charge of approximately $3,100,000 for certain closure costs and impaired assets of that center. During the quarter ended March 31, 1999, the Company closed a 120 bed leased center resulting in a charge of approximately $9,700,000 consisting of the present value of future lease payments through the end of the lease term, a residual lease obligation to be funded at the end of the lease term, severance costs and other related closure costs. These charges are reflected in the consolidated statement of operations as debt restructuring and other charges. The Company also recorded a non cash pre tax charge of $7,720,000 in the quarter ended December 31, 1999 for a stock option redemption program (the "Redemption Program") under which current Genesis employees and directors elected to surrender certain Genesis stock options for unrestricted shares of Genesis Common Stock. The Redemption Plan was approved by shareholder vote at the Company's 2000 Annual Meeting. As a result of the Company's financial condition and other considerations, the Company determined not to proceed with the Redemption Program. The elections made by optionees would have resulted in the redemption of approximately 4,600,000 stock options in exchange for approximately 4,000,000 shares of Genesis common stock. In the six months ended March 31, 2000, approximately $63,200,000 of revenue, and a corresponding amount of expense, was eliminated as a result of the consolidation of Genesis and Multicare. In connection with the Multicare joint venture restructuring, Genesis recorded a non-cash charge of approximately $420,000,000 representing the estimated cost to terminate the Put in consideration for the issuance of the Series H Preferred and Series I Preferred. The cost to terminate the Put was estimated based upon the Company's assessment that no incremental value was realized by Genesis as a result of the changes in the equity ownership structure of Multicare brought about by the restructuring of the Multicare joint venture. Depreciation and amortization expense increased $21,589,000, of which $19,100,000 is attributed to the consolidation of Multicare's results with those of Genesis. The remaining increase is principally attributed to incremental amortization of deferred financing costs, as well as incremental depreciation expense from capital expenditures made since March 31, 1999. Lease expense increased $6,027,000, of which $6,535,000 is attributed to the consolidation of Multicare's results with those of Genesis. This increase is offset by $1,600,000 attributed to six fewer eldercare centers leased during the six months ended March 31, 2000 compared to the six months ended March 31, 1999, offset by normal increases in lease rates. Interest expense increased $53,722,000, of which $36,963,000 is attributed to the consolidation of Multicare's results with those of Genesis. The remaining increase in interest expense is primarily due to additional capital and working capital borrowings and an increase in the Company's weighted average borrowing rate. 25 Minority interest of $13,027,000 recorded during the six months ended March 31, 2000 principally represents Genesis' Multicare joint venture partners' 56.4% interest in the Multicare net loss for the period. Effective October 1, 1999, Genesis adopted the provisions of the American Institute of Certified Public Accountant's Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" (SOP 98-5) which requires start-up costs be expensed as incurred. The cumulative effect of expensing all unamortized start-up costs at October 1, 1999 was $16,400,000 pre tax and $10,400,000 after tax. Preferred stock dividends increased $9,968,000. This increase is attributed to the issuance of Series H and Series I Preferred Stock in mid-November, 1999. Preferred stock dividends were restated for the six months ended March 31, 1999, resulting in an increase of $976,000, to adjust the accrual for the increasing rate dividend on the Series G Preferred Stock on a straight line basis over the term of that series. Liquidity and Capital Resources General The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern with the realization of the value of assets and the settlement of liabilities and commitments in the normal course of business. The Company has experienced significant losses and has a working capital deficit of $1,800,000,000 at March 31, 2000 due primarily to the classification of certain senior and senior subordinated debt as a current liability resulting from the Company's violation of certain covenants under the Genesis Credit Facility and the Multicare Credit Facility as well as certain of the Genesis Notes as a result of the nonpayment of interest and principal under the Genesis Credit Facility and the Multicare Credit Facility, and the nonpayment of interest under certain of the Genesis Notes. In addition, the Company has received default notices from ElderTrust, a real estate investment trust, alleging certain payment and nonpayment related defaults concerning certain mortgage loans and operating leases. Management has begun discussions with the Company's lenders under the Genesis and Multicare Credit Facilities and certain holders of the Genesis Notes and the Multicare Notes to revise the capital structures of the respective companies. Genesis and Multicare have been granted forbearance periods while discussions on their respective restructurings take place. Under the forbearance agreements, the senior creditors have, subject to certain conditions, refrained from accelerating the senior loans or exercising other remedies against Genesis and Multicare. During the forbearance periods, Genesis and Multicare have not made scheduled interest and principal payments under the Genesis and Multicare Credit Facilities. As a result of the uncertainty related to the covenant defaults and corresponding remedies, amounts outstanding under the Multicare and Genesis Credit Facilities and the Genesis Notes and the Multicare Notes have been classified as a current liability at March 31, 2000. The forbearance periods for both Genesis and Multicare expire on May 19, 2000. The Company is in discussions to extend the forbearance periods. No assurance can be given that the forbearance periods will be extended. There can be no assurances that the senior lenders or holders of the Genesis Notes or Multicare Notes will approve any amendment or restructuring of the Genesis and / or Multicare Credit Facilities or the Genesis Notes and / or the Multicare Notes. The unaudited condensed consolidated financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty related to the covenant defaults and corresponding remedies. If the senior lenders or holders of the Genesis Notes and / or the Multicare Notes accelerate the obligations under the agreements, such events would have a material adverse effect on the Company's liquidity and financial position. Under such circumstances, the financial position of the Company would necessitate the development of an alternative financial structure. Considering the Company's limited financial resources and the existence of certain defaults, there can be no assurance that the Company would succeed in formulating and consummating an acceptable alternative financial structure. In addition, in light of the Company's current financial condition and the existence of certain defaults, the Company may need to seek protection under federal bankruptcy law. 26 The Company reported a working capital deficit of $1,819,504,000 at March 31, 2000, of which approximately $2,120,000,000 is due to the reclassification of debt under the Genesis Credit Facility, the Multicare Facility, the Genesis Notes and the Multicare Notes from long-term liabilities to current liabilities as a result of the Company's' default under certain of these debt agreements. Genesis' cash flow from operations for the six months ended March 31, 2000 was a use of cash of $33,506,000 compared to a use of cash of $8,124,000 for the six months ended March 31, 1999 principally due to increased losses and the timing of vendor payments, offset by the impact of the Company's non-payment of interest previously discussed. At March 31, 2000, included in accounts receivable were approximately $5,700,000 due from HCR Manor Care (see "Legal Proceedings") and approximately $21,500,000 due from Mariner Post-Acute Network, Inc. and Mariner Health Group, Inc. ("Mariner") for the provision of certain ancillary services rendered. On January 18, 2000, Mariner Post-Acute Network, Inc. and Mariner Health Group, Inc. filed separate voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware. The Company is actively pursuing its claim for the receivables from Mariner, including participating as a member of the official unsecured creditors committee. At March 31, 2000, $54,300,000 of trade receivables and payables between Genesis and Multicare were eliminated in consolidation. Investing activities for the six months ended March 31, 2000 include approximately $28,000,000 of capital expenditures primarily related to betterments and expansion of eldercare centers and investment in data processing hardware and software. Of the capital expenditures, approximately $8,700,000 relates to the construction, renovation and expansion of assisted living facilities. Financing activities during the six months ended March 31, 2000 were positively impacted by the Company's non-payment of approximately $15,275,000 of principal obligations under the Genesis and Multicare Credit Facilities. In addition, the Company received proceeds of $50,000,000 for the issuance of common stock to Cypress and TPG in connection with the Multicare joint venture restructuring transaction. Genesis anticipates an adverse effect on operating cash flow beginning in the third quarter of 2000 due to an increase in the cost of certain of its insurance programs and the timing of funding new policies. Rising costs of eldercare malpractice litigation involving nursing care operators and losses stemming from these malpractice lawsuits has caused many insurance providers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. Accordingly, the costs of general and professional liability and property insurance premiums will increase. In addition, as a result of the Company's current financial condition it is unable to continue certain self insured programs and has replaced these programs with outside insurance carriers. In April of 2000, the Company terminated the Execuflex Plan and the Vitalink Nonqualified Plan. All amounts in these plans were distributed to the participants with no material effect to the Company's cash flow. 27 Credit Facilities and Other Debt Genesis Credit Facility Genesis entered into a fourth amended and restated credit agreement on August 20, 1999 pursuant to which the lenders amended and restated the credit agreement under which the lenders provided Genesis and its subsidiaries (excluding Multicare) a credit facility totaling $1,250,000,000 (the "Genesis Credit Facility") for the purpose of: refinancing and funding interest and principal payments of certain existing indebtedness; funding permitted acquisitions; and funding Genesis' and its subsidiaries' working capital for general corporate purposes, including fees and expenses of transactions. The fourth amended and restated credit agreement made the financial covenants for certain periods less restrictive, required minimum asset sales, increased the Applicable Margin (defined below), provided the lenders of the Genesis Credit Facility a collateral interest in certain real and personal property of the Company, and generally reallocated the proceeds thereof among the Tranche II Facility (defined below), the Genesis Revolving Facility (defined below) and the Genesis Term Loans (defined below) and permitted the restructuring of the Put/Call Agreement, as defined. Additionally, the fourth amended and restated credit agreement provides for $40,000,000 of additional borrowing capacity, (the "Tranche II Facility") available to the Company beginning in December 1999. The Genesis Credit Facility consists of three term loans with original balances of $200,000,000 each (collectively, the "Genesis Term Loans"), and a $650,000,000 revolving credit loan (the "Genesis Revolving Facility") and a $40,000,000 Tranche II Facility. The Genesis Term Loans amortize in quarterly installments through 2005. The Genesis Term Loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $110,445,000 at March 31, 2000 (the "Genesis Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $151,131,000 at March 31, 2000 (the "Genesis Tranche B Term Facility"); and (iii) an original eight year term loan maturing in June 2005 with an outstanding balance of $151,378,000 at March 31, 2000 (the "Genesis Tranche C Term Facility"). The Genesis Revolving Facility, with an outstanding balance of $645,834,000 (excluding letters of credit) at March 31, 2000, becomes payable in full on September 30, 2003. At March 31, 2000, the outstanding balance of the Tranche II Facility was $40,000,000. The aggregate outstanding balance of the Genesis Credit Facility at March 31, 2000 is classified as a current liability. The Genesis Credit Facility is secured by a first priority security interest in all of the stock, partnership interests and other equity of all of Genesis' present and future subsidiaries (including Genesis ElderCare Corp.) other than the stock of Multicare and its subsidiaries, and also by first priority security interests in substantially all personal property, excluding inventory, including accounts receivable, equipment and general intangibles. Mortgages on substantially all of Genesis' subsidiaries' real property were also granted. Loans under the Genesis Credit Facility bear, at Genesis' option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, a margin (the "Applicable Margin") that is dependent upon a certain financial ratio test. Loans under the Genesis Tranche A Term Facility and Genesis Revolving Facility have an Applicable Margin of 1.50% for Prime Rate loans and 3.25% for LIBO Rate loans. Loans under the Genesis Tranche B Term Facility have an Applicable Margin of 1.75% for Prime Rate loans and 3.50% for LIBO Rate loans. Loans under the Genesis Tranche C Term Facility have an Applicable Margin of 2.00% for Prime Rate loans and 3.75% for LIBO Rate loans. Subject to meeting certain financial ratios, the above referenced interest rates are reduced. 28 The senior creditors agreed during the forbearance period to waive the imposition of the Default Rate. However, effective with the default under the Genesis Credit Facility, the Company is no longer entitled to elect a LIBO Rate. The Genesis Credit Facility contains a number of covenants that, among other things, restrict the ability of Genesis and its subsidiaries to dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Genesis and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Genesis and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Genesis to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. Multicare Credit Facility Multicare entered into a fourth amended and restated credit agreement on August 20, 1999 (the "Multicare Credit Facility") which made the financial covenants for certain periods less restrictive, permitted a portion of the proceeds of assets sales to repay indebtedness under the Multicare Tranche A Term Facility (defined below) and Multicare Revolving Facility (defined below), permitted the restructuring of the Put/Call Agreement, increased the interest rates applying to the Multicare Term Loans (defined below) and the Multicare Revolving Facility, and increased the level of management fee Multicare may defer from two percent to four percent (on an annualized basis) in any fiscal year. The Multicare Credit Facilities consist of three term loans with an aggregate original balance of $400,000,000 (collectively, the "Multicare Term Loans"), and a $125,000,000 revolving credit loan (the "Multicare Revolving Facility"). The Multicare Term Loans amortize in quarterly installments through 2005. The loans consist of (i) an original six year term loan maturing in September 2003 with an outstanding balance of $139,301,000 at March 31, 2000 (the "Multicare Tranche A Term Facility"); (ii) an original seven year term loan maturing in September 2004 with an outstanding balance of $145,893,000 at March 31, 2000 (the "Tranche B Term Facility"); and (iii) and an original eight year term loan maturing in June 2005 with an outstanding balance of $48,382,000 at March 31, 2000 (the "Multicare Tranche C Term Facility"). The Multicare Revolving Facility, with an outstanding balance of $123,534,000 at March 31, 2000, becomes payable in full on September 30, 2003. The aggregate outstanding balance of the Multicare Credit Facility at March 31, 2000 is classified as a current liability. The Multicare Credit Facility (as amended) is secured by first priority security interests (subject to certain exceptions) in all personal property, including inventory, accounts receivable, equipment and general intangibles. Mortgages on certain of Multicare's subsidiaries' real property were also granted. Loans under the Multicare Credit Facility bear, at Multicare's option, interest at the per annum Prime Rate as announced by the administrative agent, or the applicable Adjusted LIBO Rate plus, in either event, an Annual Applicable Margin that is dependent upon a certain financial ratio test. 29 Effective with the Amendment on August 20, 1999, loans under the Multicare Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%, loans under the Multicare Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.0%, loans under the Multicare Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus a margin up to 4.25%; and loans under the Multicare Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus a margin up to 3.75%. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. The senior creditors agreed during the forbearance period to waive the imposition of the Default Rate. However, effective with the default under the Multicare Credit Facility, the Company shall no longer be entitled to elect a LIBO Rate. Effective March 20, 2000, loans under the Multicare Tranche A Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%; loans under the Multicare Tranche B Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.25%; loans under the Multicare Tranche C Term Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.5%;and loans under the Multicare Revolving Credit Facility bear interest at a rate equal to Prime Rate plus a margin up to 2.0%. The Company anticipates selling the assets of 14 eldercare centers in Ohio for approximately $36,000,000 in accordance with a signed letter of intent. All net proceeds of the disposition of assets located in Ohio are expected to be applied against the Multicare Credit Facility at the time outstanding on a pro rata basis in accordance with the relative aggregate principal amount thereof held by each applicable lender. There can be no assurances that any such sales of assets can be consummated. The Multicare Credit Facility contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to: dispose of assets, incur additional indebtedness, make loans and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, and to make capital expenditures; prohibit the ability of Multicare and its subsidiaries to prepay debt to other persons, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents; cause Multicare and its affiliates to maintain certain agreements including the Management Agreement and the Put/Call Agreement (as amended), and to maintain corporate separateness; and cause Multicare to comply with the terms of other material agreements, as well as to comply with usual and customary covenants for transactions of this nature. Other Indebtedness Genesis has outstanding an aggregate of $370,000,000 of Senior Subordinated Notes (the "Genesis Notes") with interest rates ranging from 9.25% to 9.875%. Interest on the Genesis Notes are payable semi-annually. The Genesis Notes are due in 2005 through 2009. Multicare has outstanding $250,000,000 of 9.00% Senior Subordinated Notes (the "Multicare Notes") that are due in 2007. Interest on the Multicare Notes is payable semi-annually. The aggregate outstanding balance of the Genesis Notes and the Multicare Notes at March 31, 2000 is classified as a current liability. Certain of these and other of Genesis' and Multicare's outstanding loans contain covenants which, without the prior consent of the lenders, limit certain of Genesis' and Multicare's activities. Such covenants contain limitations relating to the merger or consolidation of Genesis or Multicare and Genesis' and Multicare's ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, certain of Genesis and Multicare's outstanding loans require that Genesis and Multicare maintain certain minimum levels of cash flow and debt service coverage, and must maintain certain ratios of liabilities to net worth. Under certain of these loans, Genesis is restricted from paying cash dividends on the Common Stock, unless certain conditions are met. Genesis has not declared or paid any cash dividends on its Common Stock since its inception. 30 The Multicare Restructuring In connection with the restructuring of the Multicare transaction, Genesis entered into a Restructuring Agreement with Cypress, TPG and Nazem to restructure their joint investment in Genesis ElderCare Corp., the parent company of Multicare. Pursuant to the Restructuring Agreement the Put under the Put/Call Agreement was terminated in exchange for: o 24,369 shares of Genesis' Series H Senior Convertible Participating Cumulative Preferred Stock, which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp.; and o 17,631 shares of Genesis' Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock, which was issued to Cypress, TPG and Nazem, or their affiliated investment funds, in proportion to their respective investments in Genesis ElderCare Corp. The Series H Preferred are convertible into 27,850,286 shares of Common Stock. The Series I Preferred are convertible into 20,149,410 shares of non-voting Common Stock. The Series H and I Preferred have an initial dividend of 5.00%, which increases 0.05% beginning the sixth anniversary date and an additional 0.05% each anniversary date thereafter through the 12th anniversary date, to a maximum of 8.5%. Cypress and TPG invested in the aggregate, directly or through affiliated investment funds, $50,000,000 into Genesis in exchange for 12,500,000 shares of Genesis common stock and a ten year warrant to purchase 2,000,000 shares of Genesis common stock at an exercise price of $5.00 per share. Legislative and Regulatory Issues Legislative and regulatory action, including but not limited to the 1997 Balanced Budget Act and the Balanced Budget Refinement Act, has resulted in continuing changes in the Medicare and Medicaid reimbursement programs which has adversely impacted us. The changes have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers or other providers. There can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on us. Anticipated Impact of Healthcare Reform The Genesis eldercare centers began implementation of PPS on October 1, 1998 and the majority of the Multicare eldercare centers began implementation of PPS on January 1, 1999. The actual impact of PPS on our earnings in future periods will depend on many variables which can not be quantified at this time, including the effect of the Balanced Budget Refinement Act, regulatory changes, patient acuity, patient length of stay, Medicare census, referral patterns, ability to reduce costs and growth of ancillary business. PPS and other existing and future legislation and regulation have already and may also adversely affect our pharmacy and medical supply revenue, and other specialty medial services. As a result of the Balanced Budget Refinement Act, the Company transitioned 24 eldercare centers to the full federal rate effective January 1, 2000. The Company believes this transition will result in incremental annualized revenue of approximately $2,400,000, which will in part be offset by the continued phase-in of PPS at other facilities that have not transitioned to the full federal rate. 31 Other In August 1998, in connection with the Vitalink Transaction, the Company issued the Series G Preferred. The Series G Preferred has a face value of approximately $295,100,000 and an initial dividend of 5.9375% and generally is not transferable without our consent. The dividend rate increases on the fourth, fifth, ninth, eleventh and thirteenth anniversary dates to 6.1875%, 6.6250%, 7.0625%, 7.5% and 7.9375%, respectively. The Series G Preferred is convertible into Genesis common stock, par value $.02 per share, at $37.20 per share and it may be called for conversion after April 26, 2001, provided the price of common stock reaches certain trading levels and after April 26, 2002, subject to a market-based call premium. At March 31, 2000 there were approximately $25,000,000 of accrued, but unpaid dividends on the Series G Preferred. The Company does not anticipate paying cash dividends on the Series G Preferred in fiscal 2000. The holders of the Series G Preferred are entitled to be paid in additional shares of Series G Preferred to the extent that dividends are not declared and paid or funds continue to not be legally available for the payment of dividends after four consecutive quarterly periods, as defined. Seasonality The Company's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, seasonal census cycles, and the number of calendar days in a given quarter. Impact of Inflation The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. Genesis has implemented cost control measures to attempt to limit increases in operating costs and expenses but cannot predict its ability to control such operating cost increases in the future. Year 2000 Compliance The Company did not experience any material interruptions of business as a result of the Year 2000 computer problem. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company intends to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. 32 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of interest rate changes. Historically, the Company has employed established policies and procedures to manage its exposure to changes in interest rates. The Company's objective in managing its exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company primarily uses interest rate swaps to manage net exposure to interest rate changes related to its portfolio of borrowings. Notional amounts of interest rate swap agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates. As a result of the non-payment of interest under the Genesis Credit Facility, certain provisions under existing interest rate swap arrangements with Citibank were triggered. Citibank notified Genesis that they have elected to force early termination of the interest rate swap arrangements, and have asserted a $28,300,000 obligation. The interest rate swap termination charge is reflected in the condensed consolidated statement of operations as debt restructuring and other charges. At March 21, 2000, Genesis has no interest rate swap agreements outstanding. 33 PART II: OTHER INFORMATION Item 1. Legal Proceedings The Genesis and Vitalink Actions Against HCR Manor Care On May 7, 1999, Genesis Health Ventures, Inc. and Vitalink Pharmacy Services (d/b/a NeighborCare(R), a subsidiary of Genesis, filed multiple lawsuits requesting injunctive relief and compensatory damages against HCR Manor Care, Inc. ("HCR Manor Care") and two of its subsidiaries and principals. The lawsuits arise from HCR Manor Care's threatened termination of long term pharmacy services contracts effective June 1, 1999. Vitalink filed a complaint against HCR Manor Care and two of its subsidiaries in Baltimore City, Maryland circuit court (the "Maryland State Court Action"). Genesis filed a complaint against HCR Manor Care and two of its subsidiaries and principals in federal district court in Delaware including, among other counts, securities fraud (the "Delaware Federal Action"). Vitalink has also instituted an arbitration action before the American Arbitration Association (the "Arbitration"). In these actions, Vitalink is seeking a declaration that it has a right to provide pharmacy, infusion therapy and related services to all of HCR Manor Care's facilities and a declaration that HCR Manor Care's threatened termination of the long term pharmacy service contracts was unlawful. Genesis and Vitalink also seek over $100,000,000 in compensatory damages and enforcement of a 10-year non-competition clause. Genesis acquired Vitalink from Manor Care in August 1998. In 1991, Vitalink and Manor Care had entered into long- term master pharmacy, infusion therapy and related services agreements which gave Vitalink the right to provide pharmacy services to all facilities owned or licensed by Manor Care and its affiliates. In 1998, the terms of the pharmacy service agreements were extended to September, 2004. Under the two master service agreements, Genesis and Vitalink receive revenues at the rate of approximately $100,000,000 per year. By agreement dated May 13, 1999, the parties agreed to consolidate the Maryland State Court Action relating to the master service agreements with the Arbitration matter. Accordingly, on May 25, 1999, the Maryland State Court Action was dismissed voluntarily. Until such time as a final decision is rendered in said Arbitration, the parties have agreed to maintain the master service agreements in full force and effect. HCR Manor Care and its subsidiaries have pleaded counterclaims in the Arbitration seeking damages for Vitalink's alleged overbilling for products and services provided to HCR Manor Care, a declaration that HCR Manor Care had the right to terminate the master service agreements, and a declaration that Vitalink does not have the right to provide pharmacy, infusion therapy and related services to facilities owned by HCR prior to its merger with Manor Care. According to an expert report submitted by HCR Manor Care on May 8, 2000, HCR Manor Care is seeking $17,800,000 in compensatory damages for alleged overbilling by Vitalink between September 1, 1998 and March 31, 2000. On January 14, 2000, HCR Manor Care moved to dismiss Vitalink's claims in the Arbitration that it has a right to provide pharmacy and related services to the HCR Manor Care facilities not previously under the control of Manor Care. Oral argument on that motion will take place on May 15, 2000. Trial in the Arbitration is scheduled to begin June 12, 2000. 34 On June 29, 1999, defendants moved to dismiss or stay Genesis' securities fraud complaint filed in the Delaware Federal Action. On March 22, 2000, HCR Manor Care's motion was denied with respect to its motion to dismiss the compliant, but was granted to the extent that the action was stayed pending a decision in the Arbitration. As a result, Genesis still maintains its Delaware federal court complaint. The Vitalink Action Against Omnicare and Heartland On July 26, 1999, NeighborCare, through its Maryland counsel, filed an additional complaint against Omnicare Inc. ("Omnicare") and Heartland Healthcare (a joint venture between Omnicare and HCR Manor Care) seeking injunctive relief and compensatory and punitive damages. The complaint includes counts for tortuous interference with Vitalink's contractual rights under its three exclusive long-term service contracts with HCR Manor Care. On November 12, 1999, in response to a motion filed by the defendants, that action was stayed pending a decision in the Arbitration. The HCR Manor Care Action Against Genesis in Delaware On August 27, 1999, Manor Care Inc., a wholly owned subsidiary of HCR Manor Care, Inc., filed a lawsuit against Genesis in federal district court in Delaware based upon Section 11 and Section 12 of the Securities Act. Manor Care Inc. alleges that in connection with the sale of the Genesis Series G Preferred Stock issued as part of the purchase price to acquire Vitalink, Genesis failed to disclose or made misrepresentations related to the effects of the conversion to the prospective payment system, the restructuring of the Multicare joint venture, the impact of the acquisition of Multicare, the status of Genesis labor relations, Genesis' ability to declare dividends on the Series G Preferred Stock and information relating to the ratio of combined fixed charges and preference dividends to earnings. Manor Care Inc. seeks, among other things, compensatory damages and rescission of the purchase of the Series G Preferred Stock. On November 23, 1999, Genesis moved to dismiss this action on the ground, among others, that Manor Care's complaint failed to plead fraud with particularity. On January 18, 2000, Genesis moved to consolidate this action with the action brought against HCR Manor Care in Delaware federal court. Both of these motions have been fully submitted and are awaiting decision. The HCR Manor Care Action Against Genesis in Ohio On December 22, 1999, Manor Care filed a lawsuit against Genesis and others in the United States District Court for the Northern District of Ohio. Manor Care alleges, among other things, that the Series H Senior Convertible Participating Cumulative Preferred Stock (the "Series H Preferred") and Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock (the "Series I Preferred") were issued in violation of the terms of the Series G Preferred and the Rights Agreement dated as of April 26, 1998 between Genesis and Manor Care. Manor Care seeks, among other things, damages and rescission or cancellation of the Series H and Series I Preferred. On February 29, 2000, Genesis moved to dismiss this action on the ground, among others, that Manor Care's complaint failed to state a cause of action. That motion will be fully submitted on May 19, 2000. Genesis is not able to predict the results of such litigation. However, if the outcome is unfavorable to us, and the claims of HCR Manor Care are upheld, such results would have a material adverse effect on our financial position. See "Cautionary Statement Regarding Forward-Looking Statements." 35 Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities As of March 31, 2000, Genesis and Multicare did not made scheduled interest and principal payments in the amount of approximately $36,400,000 under the Genesis and Multicare Credit Facilities and a lease financing facility. Genesis and Multicare are also in default of other covenants under the Genesis and Multicare Credit Facilities. Genesis has not made scheduled interest payments in the amount of approximately $5,800,000 due on April 1, 2000 under its $125,000,000, 9.25% Senior Subordinated Notes Due 2006. Item 4. Submission of Matters to a Vote of Security Holders On March 16, 2000, Genesis held its Annual Meeting of Shareholders and the following actions were taken: o Stephen E. Luongo, Michael R. Walker, Phillip Gerbino, Pier C. Borra and Stephen J. Powers were elected directors; the following directors' terms of office continued after the meeting: Roger C. Lipitz, Alan B. Miller, Jack R. Anderson, Richard R. Howard and Samuel H. Howard. The votes for each nominee were as follows: -------------------------------------------------------------- For Withhold Authority -------------------------------------------------------------- Stephen E. Luongo 62,638,240 3,841,981 -------------------------------------------------------------- Michael R. Walker 63,320,255 3,159,966 -------------------------------------------------------------- Phillip Gerbino 63,871,430 2,608,791 -------------------------------------------------------------- Pier C. Borra 586,240 0 -------------------------------------------------------------- Stephen J. Powers 586,240 0 -------------------------------------------------------------- o Amendments to Genesis' Non-Employee Director Stock Option Plan which: (1) increase the number of shares issuable under the Plan by 1,650,000 shares to an aggregate of 1,875,000 shares and (2) increase the number of shares to be granted annually to each non-employee director from 4,500 to 15,000 per year; were approved with 45,535,254 votes cast for; 2,652,191 votes cast against with zero abstentions and 36,045,864 non votes; o A stock option redemption program under which Genesis employees and directors may elect to surrender Genesis stock options for unrestricted shares of Genesis Common Stock were approved with 43,497,234 votes cast for, 4,691,099 cast against with 177,402 abstentions and 36,045,864 non votes; and o Amendments to Genesis' Amended and Restated Employee Stock Option Plan and the Director Plan to provide that the number of issuable shares under the Employee Stock Option Plan will be increased by the number of options surrendered under the stock redemption program, so that the total number of shares issuable under the Employee Stock Option Plan will remain at the current level of 6,750,000 were approved with 41,738,650 votes cast for, 6,446,610 cast against with 180,474 abstentions and 36,045,865 non votes. 36 Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description ------ ----------- 27 Financial Data Schedule 99.1 Forbearance Agreement, dated as of March 20, 2000, among Genesis Health Ventures, Inc., certain Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of Credit, Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA, Inc. as Syndication Agent, First Union National Bank as Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders and Secured Parties. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated March 21, 2000, reporting its announcement that it had begun restructuring discussions with its senior lenders and that it did not expect to make scheduled payments due on its senior and subordinated debt during the discussion period. The Current Report on Form 8-K does not include financial statements. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereto duly authorized. GENESIS HEALTH VENTURES, INC. Date: May 15, 2000 /s/ George V. Hager, Jr. --------------------------------- George V. Hager, Jr. Executive Vice President and Chief Financial Officer 38 EX-99.1 2 EXHIBIT 99.1 Exhibit 99.1 FORBEARANCE AGREEMENT (GENESIS HEALTH VENTURES, INC.) FORBEARANCE AGREEMENT, dated as of March 20, 2000, (this "Forbearance Agreement") among Genesis Health Ventures, Inc., certain Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent, Issuer of Letters of Credit, Collateral Agent and Synthetic Lease Facility Agent, Citicorp USA, Inc. as Syndication Agent, First Union National Bank as Documentation Agent, Bank of America, N.A. as Syndication Agent, and the Lenders and Secured Parties referred to below. Reference is made to that certain Fourth Amended and Restated Credit Agreement, dated as of August 20, 1999, among Genesis Health Ventures, Inc., certain Subsidiaries thereof, Mellon Bank, N.A. as Administrative Agent and Issuer of Letters of Credit, First Union National Bank as Documentation Agent, Citicorp USA, Inc. as Syndication Agent, Bank of America, N.A. as Syndication Agent and the Lenders referred to therein (the "Credit Agreement") and to the other Loan Documents entered into in connection therewith. Capitalized terms not otherwise defined herein are used as defined in the Credit Agreement, the Collateral Agency Agreement referred to therein or in the other Loan Documents referred to therein. WHEREAS, a meeting was held on March 14, 2000 in which Genesis presented certain information and plans (the "Presentation") to the Lenders and other Secured Parties including, among other things, that it wishes to restructure certain of its Indebtedness and that there is a possibility that it will be unable to make certain payments on Indebtedness due to the Lenders and other Secured Parties on a timely basis; WHEREAS, the Borrowers have requested an opportunity to more fully develop and effect certain proposals discussed at that meeting; WHEREAS, the Lenders and other Secured Parties are willing to accede to the request of the Borrowers under the circumstances referred to below on the terms and conditions set forth below; NOW THEREFORE, the undersigned hereby agree as follows: 1. Definitions. The following terms shall have the meanings specified herein. a. "Forbear" means to refrain from accelerating the Loans or other Obligations or exercising remedies, whether arising by contract, at law or in equity, under the Loan Documents or otherwise, against the Borrowers or Collateral or Additional Security or withdrawing or freezing funds in deposit or other accounts pursuant to set-off rights, rights to charge such accounts or other similar rights, whether arising under the Loan Documents (including Section 1.6(c) (Authorization to Charge Accounts) or 12.18 (Set-Off) of the Credit Agreement) or otherwise or taking similar action or demanding that the Borrowers comply with Section 9.2(a)(iii) of the Credit Agreement (but does not preclude cash management functions and usual and customary payments made in connection therewith). b. "Specified Defaults" means the occurrence or existence of any Defaults or Events of Default (or similar terms under any Loan Documents) arising out of any of the following events or conditions: (i) the failure of the Borrowers to pay any principal or interest on the Loans (as more fully set forth in Sections 9.1(a) and (b) of the Credit Agreement); (ii) the failure of the Borrowers to generally pay debts as they mature, or pay any subordinated obligations, Synthetic Lease Facility obligations or other Indebtedness or otherwise default under any such Indebtedness (including, without limitation, events referred to in Section 9.1(g)(i), (iii) or (iv) of the Credit Agreement unless such events constitute a separate Event of Default under the Credit Agreement by virtue of a provision other than Section 9.1(g), in each case so long as the holders of the subordinated obligations, the Synthetic Lease Facility obligations or other Indebtedness do not take any action to enforce remedies against the Borrowers or collateral, if any; (iii) any default in the financial covenants set forth in Article 7 of the Credit Agreement; (iv) any Event of Default solely by reason of Section 9.1(j) of the Credit Agreement (Material Adverse Effect) already disclosed to the Lenders in writing or in the Presentation; (v) the failure of the Borrowers to provide cash collateral in connection with Letters of Credit (i.e., as existing or extended) pursuant to Section 3.1(h) and 9.2(a) (iii) of the Credit Agreement; (vi) the failure to pay any commitment fees, Letter of Credit fees, the Administrative Agent's regular fees and similar fees (but not the failure to pay costs and expenses); (vii) any Event of Default that has occurred or may occur under either the Pledge Agreement or the Security Agreement solely as such defined term relates to a Default or Event of Default under the Credit Agreement or any other Loan Document that constitutes a Specified Default as set forth above; and (viii) any failure by any of the Loan Parties to perform its obligations under the Loan Documents which failure constitutes a Specified Default referred to in clauses (i) through (vii) above. 2. Forbearance and Waiver. a. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, the undersigned in their capacity as Lenders direct the Administrative -2- Agent, and the Administrative Agent agrees to accept and follow such direction, to Forebear through May 19, 2000, notwithstanding any Specified Defaults. b. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, the undersigned in their capacity as Secured Parties, direct the Collateral Agent, and the Collateral Agent agrees to accept such direction, to Forbear through May 19, 2000, notwithstanding any Specified Defaults. c. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, each of the undersigned in their capacity as Lender, a Swap Party or other Secured Party, hereby agree to Forbear through May 19, 2000, notwithstanding any Specified Defaults. d. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, each of the undersigned in their capacity as a Lender, hereby agree to waive the imposition during the period commencing on the date of this Forbearance Agreement and ending on May 19, 2000 of the Default Rate in connection with any Specified Default. e. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, and notwithstanding the Borrowers' failure to satisfy each of the conditions set forth in Section 4.2 (Conditions to Each Loan and Issuance of Each Letter of Credit) of the Credit Agreement, each of the undersigned in their capacity as a Lender, hereby agrees that the Issuer of Letters of Credit may (but is not required to) issue extensions of existing Letters of Credit (in a face amount no greater than the face amount of the existing Letters of Credit) for the period commencing on the date hereof and ending on May 19, 2000 notwithstanding any Specified Default. f. Subject to the provisions of Section 5 (Conditions/Additional Undertakings) below, each of the undersigned in their capacity as a Lender, hereby agrees that the Borrowers shall not be required to maintain Interest Rate Hedging Agreements pursuant to Section 6.12 (Interest Rate Hedging Agreements) of the Credit Agreement for the period commencing on the date hereof and ending on May 19, 2000. 3. Certain Limitations. To eliminate any uncertainty, it is expressly understood and agreed that the Administrative Agent and the Collateral Agent may take any action granted to any of them under law or contract (including, without limitation, acceleration, foreclosure on Collateral and Additional Security and set-off), a. after May 19, 2000, b. in connection with any event or condition (including, without limitation, a filing of a petition in bankruptcy as referred to in section 9.1(n) of the Credit Agreement, a violation of the Indebtedness or Lien covenants set forth in Sections 8.1 and 8.2 of the Credit Agreement or the entry of a judgment referred to in Section 9.1(h) of the Credit Agreement) other than a Specified Default or -3- c. if any of the events or conditions in Section 5 (Conditions/ Additional Undertakings) below are not satisfied on a timely basis. 4. Not a Waiver. THIS AGREEMENT DOES NOT SERVE AS A WAIVER OF ANY DEFAULTS OR EVENTS OF DEFAULT WHICH MAY NOW OR HEREAFTER EXIST and, except as expressly provided above to the contrary for the period specified, the Secured Parties reserve any and all rights and remedies under the Loan Documents and other Senior Credit Documents, at law or in equity, in connection with such Defaults or Events of Default. Without limiting the generality of the foregoing, the Borrowers acknowledge and agree that: a. from and after the date that the Borrowers default in any payment obligations under the Loan Documents or there otherwise exists an Event of Default, without limiting the generality of Section 1.8(b) of the Credit Agreement, the Borrowers shall no longer be entitled to elect the LIBO Rate option for Loans and the Lessees shall no longer be entitled to elect a LIBO Rate option (or similar option) under the Synthetic Lease Facility, such prohibition to take place automatically without notice from the Administrative Agent or Synthetic Lease Facility Agent, which notice is hereby waived and b. in connection with any default in payment of any of the Obligations, Genesis will, and the Administrative Agent may, send notice to any and all trustees under subordinated debt instruments of any of the Borrowers stating that there has been a "Payment Default" or similar term and that the trustee and bond holders may not accept any payment from the Borrowers. No delay or failure on the part of the Secured Parties to exercise any right or remedy hereunder or under the Senior Credit Documents shall operate as a waiver thereof, and no single or partial exercise of any right or remedy hereunder or thereunder shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action or forbearance by the Secured Parties shall be construed to constitute a waiver of any of the provisions hereof or thereof. 5. Conditions/Additional Undertakings. a. Attached hereto as Exhibit A are the conditions precedent to the effectiveness of this Forbearance Agreement (other than the provisions set forth in Section 6 (Additional Provisions Relating to Synthetic Lease) below). Upon satisfaction of the conditions on said Exhibit A, the provisions of Section 2 above (Forbearance and Waivers) and all other provisions of this Forbearance Agreement shall be effective excepting only the provisions of said Section 6, which shall become effective when and if the conditions specified in said Section 6 are satisfied. The lack of effectiveness of any provisions set forth in Section 6 below shall not affect the validity or enforceability of any other terms hereof. b. Attached hereto as Exhibit B are the conditions subsequent to the continued effectiveness of this Forbearance Agreement through May 19, 2000. If any of the conditions set forth on Exhibit B are not satisfied by the dates specified on said Exhibit B, then -4- the obligations set forth in Section 2 (Forbearance and Waivers) above shall immediately terminate without notice on May 20, 2000 or, if earlier for any reason, upon written notice to the Borrowers given in accordance with the terms of the Credit Agreement. c. If at any time the forbearance agreement with Multicare should be terminated, the obligations set forth in Section 2 (Forbearance and Waivers) above shall immediately terminate without notice 6. Additional Provisions Relating to Synthetic Lease. a. At such time as the Required Participants (as such term is defined in the Synthetic Lease Facility documents) execute counterpart signature pages hereto the following additional provisions shall become effective: (i) Subject to the provisions of Section 5 (Conditions/Additional Undertakings) above, the undersigned in their capacity as participants in the Synthetic Lease Facility, direct the Synthetic Lease Facility Agent, and the Synthetic Lease Facility Agent agrees to accept such direction, to Forbear through May 19, 2000, notwithstanding any Specified Defaults. (ii) Subject to the provisions of Section 5 (Conditions/ Additional Undertakings) above, without limiting any of their other rights and remedies under the Synthetic Lease Facility, the Lenders under the Synthetic Lease Facility which are parties hereto, hereby agree that so long as Borrowers shall continue to observe and perform their respective obligations hereunder, an Event of Default under the Credit Agreement shall not be deemed to be a Lease Event of Default under the Synthetic Lease Facility. This waiver shall in no way constitute a waiver of any other Lease Events of Default or any other matters under to the Synthetic Lease Facility. At such time as the Required Participants execute and deliver counterpart signature pages to this Forbearance Agreement, subject to the provisions of Section 5 above, the term "Specified Default" shall automatically be modified to delete the period at the end thereof and replace it with "; and" and the following language: "(ix) any Event of Default that has occurred or may occur under the Synthetic Lease Facility solely as such defined term relates to a Default or Event of Default under the Credit Agreement or any other Loan Document that constitutes a Specified Default as set forth above." b. At such time as all of the SLF Parties execute counterpart signature pages hereto the following additional provision shall become effective: (i) Subject to the provisions of Section 5 (Conditions/Additional Undertakings) above, each of the undersigned in their capacity as a participant in the Synthetic Lease Facility, hereby agree to waive the imposition during the period -5- commencing on the date of this Forbearance Agreement and ending on May 19, 2000 of the Overdue Rate in connection with any Specified Default. At such time as all of the SLF Parties execute and deliver counterpart signature pages to this Forbearance Agreement, subject to the provisions of Section 5 above, the term "Specified Default" shall automatically be further modified to delete the period at the end thereof and replace it with "; and" and the following language: "(x) the failure of the Borrowers to pay any Basic Rent under the Synthetic Lease Facility." 7. Release. As a material inducement to the Secured Parties to enter into this Forbearance Agreement, the Borrowers and each of them (A) do hereby remise, release, acquit, satisfy and forever discharge the Secured Parties and all of their past, present and future officers, directors, employees, agents, attorneys, representatives, participants, heirs, successors and assigns, from any and all manner of debts, accountings, bonds, warranties, representations, covenants, promises, contracts, controversies, agreements, liabilities, obligations, expenses, damages, judgments, executions, actions, claims, demands and causes of action of any nature whatsoever, whether at law or in equity, which any of the Borrowers has by reason of any matter, cause or thing, from the beginning of the world to and including the date of this Forbearance Agreement with respect to any matters, transactions, occurrences, agreements, actions, or events arising out of, in connection with or relating to the Loan Documents and other Senior Credit Documents; and (B) do hereby covenant and agree never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against the Secured Parties, or any of their past, present or future officers, directors, employees, agents, attorneys, representatives, participants, heirs, successors or assigns, by reason of or in connection with any of the foregoing matters, claims or causes of action. The Borrowers expressly acknowledge and agree that the waivers, estoppels and releases contained in this Forbearance Agreement shall not be construed as an admission of wrongdoing, liability or culpability on the part of any of the Secured Parties or the existence of any claims of the Borrowers against any of the Secured Parties. 8. Governing Law. This Forbearance Agreement shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to the principles of conflict of laws. 9. Future Negotiations. The parties hereto acknowledge and agree that (A) the Secured Parties have not agreed to and have no future obligation whatsoever to discuss, negotiate or agree to any restructuring of the Borrowers' obligations with respect to the Loan Documents, the other Senior Credit Documents or any of them, or any modification, amendment, restructuring or reinstatement of the Senior Credit Documents or, except as expressly provided in this Forbearance Agreement, to forbear from exercising its rights and remedies under the Senior Credit Documents, (B) if there are any future discussions among the Secured Parties and the Borrowers concerning any such restructuring, modification, amendment or reinstatement, then no restructuring, modification, amendment, reinstatement, compromise, settlement, agreement or understanding with respect to the Borrowers' obligations with respect to the Loan Documents or other Senior Credit Documents, or any of them, or any aspect thereof, shall constitute a legally -6- binding agreement or contract or have any force or effect whatsoever unless and until reduced to writing and signed by authorized representatives of all parties, and that none of the parties hereto shall assert or claim in any legal proceedings or otherwise that any such agreement exists except in accordance with the terms of this Section 9. 10. Ratification. Except to the extent and for the period hereby waived or modified, the Credit Agreement, the Synthetic Lease Facility and each of the Senior Credit Documents is hereby confirmed and ratified in all respects. 11. Counterpart Signatures. This Forbearance Agreement may be executed in any number of counterparts, each of which will constitute an original and all of which together shall constitute one instrument. A faxed copy of a signature page shall serve as the functional equivalent of a manually-executed copy for all purposes. 12. Payment of Fees. The Administrative Agent shall allocate the forbearance fee referred to in paragraph 2 of Exhibit A hereto among those Secured Parties who sign and deliver a counterpart signature page in the manner and time set forth in paragraph 1 of said Exhibit A on a pro rata basis, based on the amount of the Obligations owing to them. The Administrative Agent's records shall be conclusive for the purposes hereof. 13. Capacity of Signing Parties. Each of the undersigned Secured Parties signs this in its capacity as a Lender and as a participant in the Synthetic Lease Facility, if applicable, and in any other capacity as a Secured Party except that unless and until the Required Participants execute and deliver counterpart signature pages hereto, Mellon Bank, N.A. shall not be deemed to sign in its capacity as Synthetic Lease Agent and the Borrowers acknowledge and agree that Mellon Bank, N. A. in its capacity as the Synthetic Lease Agent under those circumstances is not bound by the terms hereof and may act in contravention with the terms hereof. -7- IN WITNESS WHEREOF, the undersigned, intending to be legally bound, hereby signs as of the date first above written. ----------------------------------- Name of Financial Institution(1) ----------------------------------- By: Name: Title: GENESIS HEALTH VENTURES, INC., for itself and each of the Borrowers under the Credit Agreement ----------------------------------- By: Name: Title: - ---------------- (1) Subject to Section 13, signing in all applicable capacities as Secured Parties, whether as Administrative Agent, Lender or otherwise. -8- Exhibit A To Forbearance Agreement Conditions Precedent 1. Execution of this Forbearance Agreement by (a) the Borrowers, or by Genesis on behalf of the Borrowers, (b) the Required Lenders, (c) the Required Secured Parties, (d) the Administrative Agent, and (e) the Collateral Agent and return of counterpart signature pages by each to Drinker Biddle & Reath LLP (to the attention of Jill Bronson) by actual delivery at One Logan Square, 18th and Cherry Street, Philadelphia, PA 19103 or by facsimile transmission (facsimile number: 215-988-2757) no later than 5:00 p.m. (Eastern Standard Time) on March 20, 2000.(2) 2. Upon satisfaction of the condition precedent contained in the immediately preceding paragraph, payment of an irrevocable and nonrefundable fee to the Administrative Agent in immediately available funds for the benefit of each of the Secured Parties that signs and returns a counterpart to this Forbearance Agreement in the time and manner specified in paragraph 1 above. Such fee shall be in an amount equal to $667,000. 3. Payment of costs and expenses of the Administrative Agent, the Synthetic Lease Facility Agent and the Collateral Agent including, without limitation, counsel and financial consultant fees. 4. Effectiveness of a forbearance agreement for Multicare. - ---------------- (2) For purposes of paragraphs 1 and 2 of this Exhibit A, the Administrative Agent, in its sole and absolute discretion, is authorized to extend the deadline set forth in paragraph 1 above for a period not to exceed 2 Business Days and any such action on the part of the Administrative Agent shall be conclusive and binding for all purposes. -9- Exhibit B To Forbearance Agreement Conditions Subsequent --------------------- 1. A financial advisor (that is not the same as the Multicare financial advisor), reasonably acceptable to the Agents (the "Genesis Financial Advisor"), shall be retained by Genesis no later than March 24, 2000. The Agents and Policano and Manzo, financial advisor to the Administrative Agent, shall be given the opportunity to discuss (by phone or in person) the affairs of the Borrowers with the Genesis Financial Advisor from time to time upon reasonable request. 2. Policano and Manzo shall be given full access to the financial records and to the management of the Borrowers and the Borrowers shall comply with the requests made by Policano and Manzo in the letter attached hereto as Annex 1 to Exhibit B. 3. The Borrowers shall cooperate with the Collateral Agent in all remaining aspects of obtaining and perfecting the Additional Security. Without limiting the generality of the foregoing, the Borrowers will provide second Liens on the property subject to the Synthetic Lease Facility (to the extent that the necessary consents have been or can be obtained) no later than March 24, 2000. Each of the Borrowers agrees that this undertaking is a material inducement to the forbearance provided herein and but for this undertaking the Secured Parties would be unwilling to agree to the terms of this Forbearance Agreement. Further, the Borrowers agree that the value to the Borrowers of the undertakings of the Secured Parties herein is at least equal or greater than the value of this undertaking. 4. No later than April 14, 2000, Genesis shall present to the Secured Parties, a proposed plan of reorganization of its capital structure which proposal shall be shared, in preliminary form, with the Agents at least one Business Day prior thereto. The plan will have specific target dates by which certain actions will be completed. Completion of the specified actions by the specified target dates shall be additional conditions incorporated herein by reference. 5. Concurrent with the actions specified in the preceding item #4, Genesis shall develop a contingency plan. Genesis will provide information to the Agents on a regular basis as to the development of such plan and, at the request of the Agents, will present the same to the Secured Parties. -10- EX-27 3 FINANCIAL DATA SCHEDULE
5 0000874265 GENESIS HEALTH VENTURES, INC. U.S. DOLLAR 6-MOS SEP-30-1999 OCT-01-1999 MAR-31-2000 1 50,855,000 30,009,000 565,534,000 (94,392,000) 59,428,000 670,966,000 1,441,294,000 (225,441,000) 3,537,072,000 2,490,470,000 0 429,793,000 6,000 748,000 131,423,000 3,537,072,000 1,191,727,000 1,191,727,000 0 1,044,727,000 77,168,000 464,113,000 109,502,000 (503,783,000) (15,735,000) (494,702,000) 0 0 (10,412,000) (505,114,000) (10.87) (11.10)
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